Today’s inflation report for September has brought a wave of positive news, suggesting that policy rates might have reached their peak. As Dr. Sherry Cooper, Chief Economist at Dominion Lending Centres, highlights, the recent data surpassed expectations, signaling a potential shift in the trajectory of inflation and monetary policy.
In the report, Dr. Sherry Cooper notes that not only did the headline inflation rate decline, but both the year-over-year and three-month moving average core measures of inflation also showed a decrease. Coupled with a weak Business Outlook Survey from the previous day, this hints at a possible peak in the overnight policy rate, currently standing at 5%. Although she does not anticipate rate cuts until the middle of the following year, Dr. Cooper believes that the most challenging phase of the tightening cycle may already be behind us.
Gasoline prices, experiencing a year-over-year increase of 7.5% in September, played a role in offsetting the overall deceleration in the Consumer Price Index (CPI). Excluding gasoline, the CPI saw a rise of 3.7% for the month, following a 4.1% increase in August. Dr. Cooper anticipates a favorable base effect for the October inflation report, as CPI surged during the same period in the previous year. Additionally, she notes a current decrease of about 7% in gasoline prices for this month.
However, Dr. Cooper underlines the uncertainty associated with geopolitical events, particularly the ongoing conflict in the Middle East, and its potential impact on future inflation rates.
In terms of monthly changes, the CPI experienced a 0.1% decrease in September, attributed mainly to lower gasoline prices. Goods inflation also fell by 0.3% from the previous month, a trend not seen since December 2022. Meanwhile, services inflation remained unchanged from August on a monthly basis, marking a notable shift.
Addressing consumer perceptions, Dr. Sherry Cooper acknowledges that current inflation perceptions remain higher than actual inflation rates. This is attributed to highly visible price increases in groceries and gasoline. She points to a notable deceleration in food inflation and a cycle-low of 2.8% in CPI excluding food and energy.
Shifting focus to durable goods, the year-over-year pace of price increases slowed in September, particularly in categories such as furniture, household appliances, and air transportation. Additionally, the purchase of new passenger vehicles exhibited a deceleration, partly due to improved inventory levels compared to the previous year.
Dr. Sherry Cooper also brings attention to other measures of core inflation, which have shown a decline, aligning with a possible shift in the economic landscape.
In summary, while underlying price pressures remain above the Bank’s 2% target, Dr. Cooper remains optimistic about inflation moving into the Bank of Canada’s target range next year, given the slowdown in the global and North American economies. However, she cautions that the full impact of rate hikes has yet to be realized, and any potential rate cuts are likely to be considered cautiously by the Bank of Canada, not expected until the middle of next year.