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Canadian inflation was up 1.0% year-on-year in October, a repeat of the growth seen in September. Core inflation, which excludes the eight most volatile components, rose 2.1% y/y for a third consecutive month.
Price increases were widespread, with seven of the eight major components rising on a year-on-year basis. Food prices led the way, up 4.1% in October (September: 3.5%). Transportation continued to be the odd man out, down 3.2% year-on-year in October, which was the twelfth consecutive month of declines in this sub-index. Of note, the decline in transportation prices continues to decelerate as the past effects of lower energy prices work their way through the index.
Across the provinces, inflation continued to rise everywhere but Prince Edward Island, which has now seen eleven straight months of falling prices as a result of the higher weighting of energy in the provincial consumption basket.
October marked yet another month of soft headline inflation, held back by persistently weak energy prices on a year-ago basis. Looking through the energy price effect, core inflation remains boosted by the low level of the Canadian dollar, which continues to make imported goods more expensive.
The push-and-pull of various factors on headline and core inflation have made getting a handle on the 'real' inflation rate more challenging for the Bank of Canada. To this end, the Bank has begun highlighting what it calls "underlying inflation", estimated to be in the 1.5% to 1.7% range - somewhat lower than their traditional guidepost of core inflation.
"The Bank of Canada's 'underlying inflation' measure can be perplexing, as the exact calculation of the rate has not been made public. That said, it does seem to be more in line with traditional measures of inflationary pressure, such as the output gap, which would suggest core inflation is somewhat below its current level. Indeed, with economic slack expected to persist into 2017, inflationary pressures are expected to remain subdued, consistent with the Bank of Canada keeping rates on hold over this period", notes TD Economics.
