Canadian consumer prices rose 3.1% in September from a year earlier, a number that arrives nine days before the Bank of Canada decides on Oct. 28 whether to raise a policy rate that stands at 2.25%. Headline inflation is above the 3% ceiling of the Bank target range. The two core measures the Bank prefers, CPI-trim at 1.8% and CPI-median at 1.9%, are both below the 2% target. Both facts are accurate, and the decision depends on which one the Bank believes will persist.
What the Core Measures Are Actually Saying
The September report, released Oct. 19, came in 0.1 points below the 3.2% forecast in a Reuters poll. August was 3.0%. The monthly change was 0.1%, against 0.2% expected. CPI-trim eased to 1.8% from 1.9%, CPI-median to 1.9% from 2.0%, and CPI-common to 2.4% from 2.6%.
The gap between headline CPI and CPI-trim shows how far fuel has pulled the two apart. In February, headline inflation ran 0.5 points below CPI-trim. By September it ran 1.3 points above, the widest reading in the series.
The gap is year-over-year headline CPI minus year-over-year CPI-trim. September headline CPI was 3.1% and CPI-trim was 1.8%. In February the gap was negative 0.5 points.
Energy explains most of that gap. Gasoline prices were up 27.8% from a year earlier in September, according to figures drawn from Statistics Canada, and consumer prices excluding gasoline rose 2.2%. The core measures strip out or down-weight the largest price swings, so a fuel shock lifts headline inflation without lifting CPI-trim. WTI for December delivery traded near US$97.92 on Oct. 21, which keeps the fuel effect in the October and November data.
Why the Governor Warning Still Matters
Governor Tiff Macklem said in Bangkok on Oct. 16 that “the risk that inflation broadens and becomes more persistent has gone up.” That sentence is about the path of core inflation, not its current level. A one-time fuel shock raises the price level once. It becomes a rate problem only if firms and workers begin to treat higher prices as permanent and build them into wages and contracts.
The September data does not yet show that. CPI-trim and CPI-median have both fallen since February. The labour market points the same way: the Oct. 9 Labour Force Survey recorded 68,300 net job losses and an unemployment rate of 6.5%. Weak hiring reduces the pressure for wage-led inflation.
Markets are not pricing that reading. Swaps put the odds of a hike near 78% on Oct. 20, up from about 60% earlier, according to Brown Brothers Harriman strategist Elias Haddad. Five Bay Street economists surveyed by Canadian Mortgage Professional expected a hold, and RBC economist Abbey Xu expects 2.25% through 2026. The data in hand supports the economists. A hike would be a bet on broadening that the September report does not show.
The Transmission to Mortgages and the Dollar
A hike reaches households in two stages. Variable-rate mortgages and lines of credit reprice at once, because they are priced off the policy rate. Fixed mortgage rates respond to Government of Canada bond yields, which tend to move on hike expectations, so part of a decision is often priced before it arrives.
The currency adds a second channel. The Federal Reserve raised its target range on Sept. 16 to 3.75% to 4.00%, which puts it 1.50 to 1.75 percentage points above the Bank of Canada rate. The Canadian dollar traded near 71.08 U.S. cents on Oct. 21, and USD/CAD moved to 1.4106 from 1.4075 after the CPI release. A weaker dollar raises the price of imports, which would feed back into the same headline number the Bank is trying to read through. The next CPI report, on Nov. 16, is the first test of whether the energy shock is spreading.