- Canada’s headline consumer price index fell 0.2% on a not seasonally adjusted basis in October 2013, which was a bigger monthly decline than market forecasts for a 0.1% dip.
- On a year-over-year basis, the inflation rate dropped to 0.7% from 1.1%.
- The Bank of Canada’s core measure increased 0.2% on an unadjusted basis in the month, which was in line with market expectations. The year-over-year rate slipped to 1.2%.
- Canada’s inflation rates continued to gyrate around the bottom end of the Bank’s 1% to 3% target band with both the headline and core measures falling below the third quarter of 2013’s averages of 1.2% and 1.3%, respectively, in October. The combination of excess capacity in the economy and one-off factors has kept Canada’s core inflation rate below the Bank’s 2% target for 16 successive months. This was one of the factors that the Bank mentioned in its October 23, 2013 rate decision to justify the removal of its mild tightening bias. At that time, the Bank noted that the persistently low inflation environment created a risk of inflation remaining below the Bank’s 2% target and that this development had take on “increasing importance.” By our estimate, inflation will only reach the 2% target late in 2015, thereby setting up for the Bank to begin to reduce the amount of policy stimulus in the second quarter of that year.
The unadjusted all-items Canadian consumer price index (CPI) index fell 0.2% in October 2013, and the annual inflation rate dropped to 0.7% from 1.1%. On a seasonally adjusted basis, consumer prices dipped 0.1% in October. The Bank of Canada’s core measure rose an as expected 0.2% on an unadjusted basis and was flat on a seasonally adjusted basis. Relative to a year earlier, the Bank’s core rate inched down to 1.2%.
The 0.2% dip in the monthly headline inflation rate in October reflected a sharp 5.1% drop in gasoline prices. Lower prices for traveller accommodation, natural gas, and electricity also weighed on the monthly index. On the upside, prices for passenger vehicles rose in October as did footwear prices and household equipment costs. The annual update on property taxes showed a 3.2% increase, which was larger than the 2.8% rise recorded in 2012. Relative to a year earlier, three of main upward movers were connected to shelter costs with rent (1.6%), property taxes (3.2%), and homeowners’ replacement costs (1.8%) posted gains. Passenger vehicle prices also increased by 1.7% in the year to October. Countering these gains were sharply lower gasoline prices, mortgage interest costs, and prescribed medicine prices. Of the major components of the CPI, only recreation, reading, and education costs increased at a faster year-over-year pace than in September and even then were only 0.3% higher than in October 2012. Food price inflation slowed to 0.9% in October, clothing and footwear prices were 0.7% below year-ago levels, and transportation costs inched 0.1% below where they were in October 2012.
Canada’s inflation rates continued to gyrate around the bottom end of the Bank’s 1% to 3% target band with both the headline and core measures falling below the third quarter of 2013’s averages of 1.2% and 1.3%, respectively, in October. So far this year, price increases among the major components have been muted with some of the components, such as mortgage interest costs, staying well below year-ago levels. The combination of excess capacity in the economy and one-off factors have kept Canada’s core inflation rate below the Bank’s 2% target for 16 successive months. This was one of the factors that the Bank mentioned in its October 23 rate decision justifying the removal of its mild tightening bias. At that time, the Bank noted that the persistently low inflation environment created a risk of inflation remaining below the Bank’s 2% target and that this development had taken on “increasing importance.” The October report provided little sign of the reversal of this trend despite the forecasted pickup in the economy in the third quarter. We expect real gross domestic product (GDP) growth increased at a 2.8% annualized pace in the third quarter, which would be faster than the economy’s potential rate and the Bank of Canada’s 1.8% projection, thereby making it likely that the output gap was smaller than the Bank’s estimate of 1.5 percentage points at the end of the third quarter. Having said that, the difference is relatively small, meaning that it will take a sustained period of above-potential growth before the output gap closes and the Bank is in position to raise the overnight rate. By our estimate, the output gap will be eliminated in the third quarter of 2015, thereby setting up for the Bank to begin to reduce the amount of policy stimulus in the second quarter of that year.
RBC