Canada’s inflation rate dropped below 2 per cent in September for the first time in more than three years, the latest sign of price stability that potentially tips the Bank of Canada to a larger interest-rate cut next week.
The consumer price index (CPI) rose at an annual rate of 1.6 per cent in September, down from a 2-per-cent pace in August, Statistics Canada said Tuesday in a report. Financial analysts were expecting a slowdown to 1.8 per cent. On a monthly basis, consumer prices fell 0.4 per cent.
This marked the weakest inflation rate since early 2021, when Canada was in the throes of a pandemic that momentarily resulted in weak price increases, but gave way to the largest upswing in consumer prices in four decades.
The results in Tuesday’s report were heavily influenced by gasoline prices, which fell 7.1 per cent in September from August. Excluding gas, the CPI rose at an annual pace of 2.2 per cent, matching the increase in August.
The inflation fight is effectively over, a milestone for the Canadian economy after CPI growth peaked in 2022, prompting central bankers to jack up interest rates to cool demand. Because of the progress to date, the Bank of Canada has delivered three consecutive rate cuts since June, taking its policy rate to 4.25 per cent from 5 per cent.
In recent weeks, economists and investors have debated whether the central bank will cut rates by another quarter-point at its next decision on Oct. 23, or opt for a larger half-point reduction.
However, after the inflation report was published, investors are more heavily leaning toward a larger cut. Markets are pricing in a 75-per-cent chance that the BoC lowers its benchmark interest rate by 50 basis points next, compared to roughly 50-50 odds before the report, according to Bloomberg data. (A basis point is 1/100th of a percentage point.)
“The Bank of Canada needs to do something to revive the economy and stop inflation from falling too far,” said Royce Mendes, head of macro strategy at Desjardins Securities, in a client note. “Our view is that a 50-basis-point rate cut is the right dose of medicine.”
Inflation came in lower than Bank of Canada estimates in the third quarter, and it’s been generally soft this year. Weaker household spending, more resilient supply chains and lower commodity prices have all helped to quell consumer price increases. Because of higher borrowing costs, many households have been forced to tighten their budgets.
Housing costs rose by an annual 5 per cent in September, down from 5.3 per cent in August. Rents rose by 8.2 per cent – quite elevated by historical standards, but down from 8.9 per cent in August. Other data sources are indicating that rents are declining in some cities.
Grocery prices rose 2.4 per cent in September, year over year, matching the increase in August. Clothing and footwear prices have dropped 4.4 per cent over the past year.
On a three-month annualized basis, the Bank of Canada’s core measures of inflation – which strip out volatile movements in the CPI – slowed to 2.1 per cent in September from 2.3 per cent in August.
The Bank of Canada has recently warned that inflation could drift below its 2-per-cent target. And while the BoC is unlikely to be alarmed by one month of below-target inflation – especially when the results are heavily influenced by volatile gas prices – it has stressed that economic activity needs to pick up to ensure this doesn’t become a trend.
Several analysts have said that inflation could pick up in the coming months, particularly with gas prices rising in October. The Bank of Canada is projecting a sustainable return to the 2-per-cent inflation target in 2025, although its economic forecasts will be updated next week.
Bank of Montreal chief economist Doug Porter said the drop in the annual inflation rate below 2 per cent was a “watershed moment.”
“It’s a close call, but we suspect that the big improvement in inflation, the still-high unemployment rate, and the still-sour consumer and business sentiment will be enough to prompt the Bank of Canada to opt for a 50 [basis point] rate cut later this month,” he said in a client note. “After all, the BoC has dovishly signalled that they are now more concerned about downside risks to the economy and the possibility that inflation may drop too low.”
