REAL ECONOMY BLOG | November 21, 2023

Canada’s consumer price index in October speaks loud and clear: Disinflation is here, and no more rate hikes by the Bank of Canada are needed.

Inflation fell to 3.1% on a year-over-year basis, according to Statistics Canada on Tuesday. On a monthly basis, prices fell by 0.1%. The plunge is largely because gasoline prices decreased by 7.8%. Core inflation measures also continued the downward trend.

The bulk of inflation is driven by mortgage interest rates, a direct effect of monetary policy.

Excluding mortgage payments, inflation fell to 2.2%, which is close to the Bank of Canada’s 2% inflation target. Excluding shelter, inflation came in below the target, at 1.9%.

In the months ahead, price pressures will continue to ease. Consumer spending in aggregate has plateaued, even with higher immigration. On a per capita basis, consumer spending has dropped.

Households facing higher mortgage payments are now cutting back on discretionary spending. And this is just the beginning as more mortgages come up for renewal at higher rates in the coming months.

Gasoline prices stayed low in November, so next month’s CPI report is also likely to show price increases easing.

The data

On a year-over-year basis, food prices increased by 5.6%, with groceries rising by 5.4%, well above the headline number but at the lowest level in the past two years. The deceleration, especially in fresh vegetables (5% year over year) was welcome news for households.

Service prices went up by 4.6%, the highest since March last year, most likely because of wage growth. Service prices have been sticky throughout the inflationary cycle as businesses have passed on the higher costs of labour to consumers. But with consumer demand waning and wage growth potentially easing, it is unlikely to persist.

Shelter is a sore point in the fight against inflation. In addition to the rise in mortgage payments, property taxes increased by 4.9% because municipalities required larger budgets to cover rising costs.

The housing shortage also kept upward pressures on rents, which rose by 8.2% in October, faster than in September. Shelter is the only area that will see little relief in the coming months.

The takeaway

The inflation report is the latest sign of a cooling economy that should make the Bank of Canada feel comfortable keeping the policy rate unchanged next month. At this point, the central bank can sit back and let the forces of monetary policy work their way through the economy, keeping inflation near 3%.

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