Headline CPI inflation increased in October to 2.0% year-on-year (y/y), above expectations for a 1.9% y/y print and up from the 1.6% y/y reading from September.

The acceleration was due to base-year effects on gasoline prices (the impact of price changes from a year ago falling out of the data), which were down 4.0% y/y, compared to down 10.7% y/y in September. Also pushing prices higher were food costs (2.7% y/y), which have been rising faster than overall inflation for three straight months.

Encouragingly, inflation in services has continued to ease (3.6% y/y from 4.0% y/y in September). Shelter costs have been a big driver of services inflation, but with lower interest rates, mortgage interest cost inflation has decelerated (14.7% y/y from 16.7% y/y in September), while rent inflation is also easing (7.3% y/y from 8.2% y/y in September).

The Bank of Canada’s preferred “core” inflation measures increased to 2.6% y/y on average, from 2.4% y/y in September.

Key Implications

Yesterday’s data reinforced the message that the Bank of Canda’s (BoC) goal of stabilizing inflation won’t be a smooth path. While the increase in headline inflation was expected, the move higher in core inflation was discouraging. Even worse, on a three-month basis, core inflation moved from just above the BoC’s target, at 2.1%, to 2.8%. That was a big move and points to core inflation remaining above the BoC’s target in the coming months. High inflation for shelter, food, and health care were behind this, and aren’t looking likely to go away any time soon.

The BoC is likely to view today’s data release as a minor setback. Inflation had become a background worry, and while it isn’t raising any red flags yet, yesterday’s data is a reminder that getting price growth to settle at 2% will take time. The BoC will also be getting a reading on Q3 GDP growth next week. That release will do a lot to help guide the central bank in deciding whether it will cut by 25 or 50 bps in December. We think that a 25 bp cut remains the most likely outcome, especially given the resilience that the economy has demonstrated over the last few months.