Canadian Inflation Holds Steady at 1.9%, Core Measures Inch Up

(Bloomberg) -- Canadian consumer prices continued to hold steady in a tight range around the Bank of Canada’s inflation target, giving policy makers one less reason to consider immediate interest rate cuts.

Annual inflation in September was unchanged at 1.9%, Statistics Canada reported Wednesday. That was below economist expectations for a 2.1% reading. Underlying price pressures -- as measured by core inflation -- ticked up slightly to 2.1% from 2% in August.

Key Insights

• Stronger inflation dynamics in Canada are one reason why economists and markets have been anticipating fewer cuts, and a slower pace of reductions, by the Bank of Canada than the Federal Reserve. Both the headline and core readings have been steady at around 2% in recent months
• In fact, inflation in the third quarter turned out stronger than the Bank of Canada anticipated in its last quarterly forecasts released in July, when it projected it to slow to 1.6% amid easing gasoline prices. Instead, inflation in Canada averaged 1.9% in the quarter
• While the headline inflation rate has been more volatile, underlying price pressure has been stable near the Bank of Canada’s 2% target for well over a year. The core rate hasn’t surpassed 2.1% since 2009

Market Reaction

Canada’s currency extended declines after the release and was down 0.2% at C$1.3218 against its U.S. counterpart at 8:32 a.m. in Toronto. Yields on 2-year government bonds fell 2 basis points to 1.67%.

The Bank of Canada’s next rate decision is on Oct. 30, with investors placing hardly any odds for a rate move later this month.

The report “won’t change the Bank of Canada’s neutral policy stance,” said George Davis, chief technical strategist at RBC Capital Markets in Toronto.

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• On a monthly basis, consumer prices fell 0.4% in September, a bigger decline than the 0.2% expected by analysts
• On a seasonally adjusted basis, prices fell 0.1%. That’s the third monthly decline in seasonally adjusted prices in the past four months -- reflecting weaker gasoline prices and declines in air transportation
• While there was a small drop in gasoline prices in September, they are down 10% from a year earlier
• The drop in the consumer price index in September was led by a decline air transportation prices and tuition fees. Clothing prices were the main upward contributor in September
• The average of three measures of core inflation tracked by the Bank of Canada rose to 2.07%, from 1.97% in August. All three measures recorded a tenth of a percentage point increase, with the common rate at 1.9%, the median at 2.2% and trim at 2.1%

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