Consumer prices in Canada rose at the slowest pace since June, a reassuring sign for central bank policymakers that rates are now high enough to significantly cool inflation pressures.

The consumer price index increased 3.1% in October from a year ago, following a 3.8% increase in September, Statistics Canada reported Tuesday in Ottawa. That matched the median estimate in a Bloomberg survey of economists.

The deceleration was largely a result of lower prices for gasoline, while the largest contributors to the increase remained mortgage interest costs, food and rent.

On a monthly basis, the index rose 0.1%, matching expectations and following a 0.1% decline in September.

October’s deceleration cemented views that the Bank of Canada has reached the end of its tightening cycle. The data also suggest price increases may slow further in the coming months — potentially paving the way for interest-rate cuts in the first half of 2024.

Short-term Canada bonds fluctuated, bringing the two-year benchmark yield to 4.388% at 11:28 a.m. Ottawa time. The loonie rallied to C$1.3693 per US dollar, up 0.2% on the day.

Two key yearly inflation measures that are tracked closely by the Bank of Canada — the so-called trim and median core rates — also eased, averaging 3.6% from an upwardly revised 3.8% a month earlier. That also matched survey forecasts.

Another key measure, a three-month moving average of underlying price pressures, fell to an annualized pace of 2.96% from 3.67% a month earlier, according to Bloomberg calculations. It’s an important metric because Bank of Canada Governor Governor Tiff Macklem has said policymakers are tracking it closely to understand inflation trends.

“We may look back at this as an important turning point,” said Andrew Kelvin, head of Canadian and global rate strategy for Toronto-Dominion Bank, said by email. “It’s a much larger drop in three-month annualized core inflation than we’d expected, and if sustained it should move up the time frame for BOC easing. I still expect Macklem to sound hawkish this week and in December, but it opens the door to a tone change as soon as January.”

Tuesday’s numbers will give policymakers more confidence their previous rate hikes are working to slow the economy and inflation. Macklem and his officials held interest rates steady at 5% for the second straight meeting last month.

“Tighter policy does seem to be working,” Robert Kavcic, a senior economist at Bank of Montreal, said on BNN Bloomberg Television.

Rate Decision in 15 Days

This is the only inflation report before the Bank of Canada’s next rate decision on Dec. 6, when the majority of economists in a Bloomberg survey expect the bank to keep borrowing costs unchanged again. “Looking ahead, a weak economic backdrop should work to limit prices further in these measures, and could allow the BOC to start cutting rates as early as Q2 next year,” said Katherine Judge, an economist with the Canadian Imperial Bank of Commerce, in a report to investors.

In its monetary policy report last month, the central bank said it expects the consumer price index to average about 3.5% through mid-2024, but slashed gross domestic product growth forecasts because consumers are pulling back on demand. Policymakers now expect to hit the 2% inflation target in the second half of 2025.

Macklem will give a speech on the cost of high inflation before the Saint John Region Chamber of Commerce in New Brunswick on Wednesday.

What Bloomberg Economics Says...

Given the steady reading on labor-intensive services prices — the result of a softening labor market — the BoC is unlikely to surprise markets by raising rates again.

— Stuart Paul. To read the full note, click here

In October, goods inflation decelerated to 1.6%, led by lower prices at the pump. Prices for gasoline dropped 7.8% from a year ago after rising 7.5% a month earlier, while grocery prices continued their trend of slower year-over-year growth, with a 5.4% increase following a 5.8% gain in September.

But services inflation rose to 4.6%, faster than the 3.9% pace in September and putting upward pressure on consumer prices, largely driven by higher prices for travel, rent and property taxes. Prices for travel tours rose 11.3% from a year ago, after a decline of 2.2% in September, with faster price growth largely driven by travel to US destinations.

Canadians continued to feel the impact of rising rental costs, which rose 8.2% from a year ago, compared with 7.3% in September. That increase reflected acceleration across most provinces, with the largest gains seen in Nova Scotia and Alberta, where rent prices rose 14.6% and 9.9%, respectively.

Property taxes and other special charges, priced annually in October, rose 4.9% from a year ago. That’s the largest increase since October 1992, with homeowners paying more in nearly all provinces as municipalities required larger budgets to cover rising costs. Manitoba is the only province where property taxes declined.

Regionally, prices increased at a slower pace from a year ago compared with September in all 10 Canadian provinces.

--With assistance from Erik Hertzberg and Derek Decloet.

(Adds more information, market moves and economist comments.)

Author: Randy Thanthong-Knight