Falling Gas Prices Push Canadian Inflation Below Poloz’s Target

(Bloomberg) -- Canada’s inflation rate dropped to its slowest pace in 10 months, easing pressure on the central bank to press ahead with interest rate increases.

The consumer price index recorded an annual pace of 1.7 percent in November, down from 2.4 percent a month earlier, as gasoline prices recorded their biggest one-month drop in almost four years. Economists had forecast a 1.8 percent pace.

The data paint a benign inflation picture for the Canadian economy, with little sign of underlying price pressures that would prompt more immediacy from the Bank of Canada, which has already increased borrowing costs five times since mid-2017. Investors have scaled back bets on further hikes, and are now pricing in just one more next year.

“This situation, combined with the recent deterioration in financial markets, argues for an extended pause in the BOC’s tightening campaign,” Matthieu Arseneau, an economist at National Bank of Canada, said in a note to investors.

Core measures of inflation -- seen as a better gauge of pressures -- nudged slightly lower in November, averaging 1.9 percent. That’s down from 2 percent in October.

A 2 percent core rate is consistent with an economy at full capacity, but not one that is overheating. Bank of Canada Governor Stephen Poloz reiterated this week that policy makers expect they will continue to move borrowing costs higher eventually, in part because core inflation is near its 2 percent target.

Yet, the recent weakness in the oil sector has prompted a more cautious stance and effectively eliminated chances of a near-term hike. Investors are pricing in just a 6 percent chance of an increase at the Bank of Canada’s next decision on Jan. 9, with odds for a rate increase some time in the first half at just 40 percent. Economists surveyed by Bloomberg earlier this month, however, are predicting one rate increase by May.

The data Wednesday confirm the spike in consumer prices earlier this year, with inflation rising to a seven-year high of 3 percent in July, was transitory -- as the Bank of Canada had predicted at the time.

Gasoline prices, responsible for the spike, are now acting as a drag on the inflation index. They are down 5.4 percent from a year earlier.

Still, underlying inflation pressures remain stronger than they were earlier this year. Core measures have hovered around the 2 percent level since February, after averaging 1.5 percent in 2017.

In its most recent forecasts released in October, the central bank estimated inflation would average 2.3 percent in the fourth quarter.

Other CPI Highlights

• Monthly inflation was down 0.4 percent in November, in line with economist forecasts
• On a seasonally adjusted basis, inflation was also down 0.2 percent, the biggest one-month drop since May 2017
• Two of three measures of core inflation fell. The ‘common’ rate was unchanged at 1.9 percent, the ‘trim’ fell to 1.9 percent from 2.1 percent, and ‘median’ to 1.9 percent from 2 percent
• In addition to gasoline, the biggest drags on the consumer price index last month were travel costs and women’s clothing
• Fresh vegetables, up 8.4 percent in November, were the biggest upward contributors.

--With assistance from Erik Hertzberg, Paula Sambo and Greg Quinn.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary, Chris Fournier

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