Inflation’s sharp drop to 1.6% fuels calls for half-point rate cut

The annual rate of inflation slowed sharply in September, falling below the Bank of Canada’s two per cent target, Statistics Canada reported Tuesday.
Annual inflation was 1.6 per cent in the month, down from two per cent in August, thanks largely to continually lower gasoline prices, the agency said.
The yearly price pressures are now at their lowest levels since February 2021, StatCan said.
Price hikes at the grocery store remained steady at 2.4 per cent year-over-year. Despite annual declines for seafood and nuts and seeds, fresh or frozen beef prices were up 9.2 per cent last month, edible fats and oils cost 7.8 per cent more and egg prices rose 5.0 per cent annually.
Prices for airfare were down 4.4 per cent in September and fell 14.3 per cent on a monthly basis, which StatCan noted was typical of seasonal trends heading into the fall.
While rent and higher mortgage costs continue to lift inflation, there was some cooling on the shelter front in September as well. Rents rose 8.2 per cent annually last month, down from 8.9 per cent in August, StatCan said.
Despite the recent easing in the annual figures, the agency added that, over the past three years, the cost of living has soared and remained elevated.
Tu Nguyen, economist with RSM Canada, says that while the more modest levels of inflation are likely welcome news for consumers, Canadians should not expect a return to pre-pandemic prices.
“Price levels are right now permanently higher than they were from a few years ago, and that’s not going to change. We are not going to see prices straight-up coming down,” she says.
There are exceptions in certain categories of the consumer price index, like airfare and clothing, which reported annual declines in September.
Shannon Terrell, lead writer and spokesperson with NerdWallet Canada, says there are segments where Canadians are “getting a little bit of a break,” but the bulk of price hikes in recent years have been in the “non-negotiables” like shelter and grocery costs.
The overall consumer price index is up 12.7 per cent over three years, with rent up 21 per cent and grocery prices up 20.7 per cent over that period, according to StatCan.
“Although we’re seeing inflation in a better place now, we have to acknowledge by and large that Canadians have been struggling with these raised costs for essentials for a number of years now,” Terrell tells Global News.
“The cumulative effect of inflation, especially over the last couple of years, really cannot be understated.”
The Bank of Canada has been lowering its benchmark interest rate in recent months as its focus shifts increasingly towards fears that inflation will dip too far below its two per cent target.
The sharp drop comes ahead of the Bank of Canada’s next interest rate decision on Oct. 23. While another interest rate cut is widely expected by economists, forecasters are weighing whether a steeper, 50-basis-point drop could be in the cards, rather than the typical 25-basis-point step.
Some economists said Tuesday that the sharp drop in inflation last month tilts the scales towards a bigger cut.
BMO chief economist Doug Porter said in a note to clients Tuesday that the latest inflation figures, alongside recent data releases showing consumer and business sentiments are still depressed and the unemployment rate remains elevated, “will be enough to prompt the Bank of Canada to opt for a 50 bp rate cut later this month.”
Canadian swap markets increased the bets for an oversized 50 basis point rate cut next week to 67 per cent after the inflation data was released, according to Reuters, up from roughly 52 per cent previously.
Nguyen also believes there’s little reason for the Bank of Canada to hold back from an oversized step as inflation continues to cool.
“This report certainly increases the odds of a 50-basis-point cut, but that is not set in stone,” she says.
While StatCan’s September jobs report was relatively strong, she believes the surge in full-time hiring was in part spurred by the central bank’s own rate cuts, as businesses feel increasingly confident to add to their payrolls.
If the Bank of Canada does not pick up the pace of its cuts, Nguyen believes the so-called “soft landing,” wherein the Canadian economy returns to price stability without tipping into a recession, would be at risk.
Nguyen expects annual inflation will float around two per cent in the months ahead. But if the Bank of Canada keeps rates at restrictive levels for too long, that could drive inflation even lower, she argues.
While rock-bottom inflation rates, or even deflation, might sound great to consumers, Nguyen says such a scenario could have disastrous impacts on the Canadian economy. If households believe prices are going to keep dropping lower, they’ll hold back their spending, delaying the economic recovery the Bank of Canada is hoping to stimulate.
“If the Bank of Canada does not speed up, it risks putting the economy into a contractioning trajectory,” Nguyen says.
— with files from Global News’s Anne Gaviola, Reuters