Annual pace of inflation slowed to 2.2% in September

Economists had expected the September figure to come in at 2.7%, according to Thomson Reuters Eikon.

The inflation report comes ahead of the Bank of Canada’s rate decision next week when it will also update its forecast for the economy in its monetary policy report.

The central bank, which aims to keep inflation within a target range of 1% to 3% and adjusts its interest rate target to help achieve that goal, is expected to raise its key interest rate target, which sits at 1.5%, by a quarter of a percentage point.

TD Bank senior economist James Marple said the
softer-than-expected inflation report did little to alter TD’s
expectation that the Bank of Canada will raise rates next week.

“I don’t think one month of soft price growth is going to change the Bank of Canada’s mind on a rate hike,” he said.

Marple said the new U.S.-Mexico-Canada Agreement removed a key risk for the economy, but added challenges such as high household debt remain.

“There’s still are some underlying risks that have always been there and maybe weren’t in the spotlight because we were all focused on trade,” he said.

“We have very high household debt levels. We have mortgage rates that have been increasing and will continue to increase even with very little action from the Bank of Canada.”

Statistics Canada said prices were up in all eight major components for the 12 months to September.

The transportation index, which includes gasoline, was up 3.9% in September compared with a 7.2% move in August as gasoline prices last month were up 12% compared with a 19.9% increase in August.

However, the transportation group remained the largest contributor to the overall year-over-year increase in the index.

Food prices were up 1.8%, while shelter costs rose 2.5%. Alcoholic beverages and tobacco products were up 4.4%.

Bank of Montreal chief economist Doug Porter noted the price of air fares, while up 7.4% from a year ago, fell 16.6% compared with the previous month. Hotel rates were also down 5.2% compared with a year ago.

“With travel tours also down 3.2%, that meant that tourism overall got a lot cheaper in Canada last month,” Porter wrote in a brief report, adding that vehicle prices were up just 0.7% on a year-over-year basis.

“All of these soft sectors combined to clip core inflation as well, although the easing there was much less dramatic than in the headline tally,” Porter said.

The average of the three measures of core inflation, which look to strip out more-volatile items like gas prices and are closely scrutinized by the Bank of Canada, was 2% in September compared with 2.1% in August.

In a separate report, Statistics Canada said retail sales fell 0.1% in August to $50.8 billion as sales moved lower in seven of 11 of the subsectors tracked by the agency.

Sales at gasoline stations were down 2%, while clothing and clothing accessories stores fell 1.2%. Motor vehicle and parts dealers saw sales increase 0.8%.

Retail sales in volume terms were down 0.3%.