Energy prices continued to keep Canada’s inflation modest in September

Inflation rose 1.0% year-on-year in September, slowing somewhat from the 1.3% growth recorded in August as a result of lower gasoline prices. Core inflation, which excludes the eight most volatile components, rose 2.1%, repeating its August gain.

Inflation gains were widespread, with seven of the eight major components rising in September. In particular, food prices were up 3.5% year-on-year, as vegetables, meat, and restaurant food purchases all saw year-on-year price increases.

Unsurprisingly, the component holding headline inflation back was energy prices. The transportation sub-index fell by 3.5% in September, led by dropping gasoline prices, which were down -18.8% in September (August: -12.6%).

Consumer prices were up across nearly all provinces, with the exceptions of Nova Scotia and Prince Edward Island. Prices rose by 1.3% in the western half of the country (excluding Saskatchewan, where they rose 1.4% year-on-year in September). With the exception of B.C., this marked a decline relative to the August pace of inflation. From Ontario east-ward, gains were more modest. Of note was Prince Edward Island, which recorded its tenth consecutive fall in consumer prices owing largely to the higher weighting of energy prices in the provincial consumption basket.

The dichotomy that has characterized inflation so far this year continued in September. Headline inflation remains weak, dragged down by energy prices that remain well below their year-ago levels. At the same time, the significant deprecation of the Canadian dollar since last summer has made imports more expensive, helping keep core inflation (slightly) above the Bank of Canada's 2% target.

With multiple factors pushing inflation rates in different directions, the Bank of Canada has begun to highlight the rate of 'underlying inflation', which attempts to strip out temporary factors to highlight the 'true' inflation rate. This week's Monetary Policy Report reconfirmed that the Bank sees this 'underlying' rate as being in the 1.5% to 1.7% range - a weaker pace than implied by core inflation. 

"Although the third quarter of this year is likely to be have seen a robust recovery in economic output, growth is expected to moderate thereafter, and is unlikely to result in signficant inflationary pressures. As a result, core inflation is expected to remain around the 2% target, with headline inflation eventually following. From the Bank of Canada's perspective, with 'underlying inflation' below target, the current level of interest rates remains appropriate. There is little for the Bank to be concerned about in the inflation outlook, and so we continue to expect the Bank to keep rates on hold well into 2017", says TD Economics.