The Bank of Canada is looking for underlying inflation to ease alongside the slowdown in the Canadian economy. With today’s report, coming just before next week’s rate decision, it’s likely they still haven’t found what they’re looking for, but will still lean towards cutting.

At 2.4%, the year-over-year change in the overall Consumer Price Index in September was up from August’s reading of 1.9%. An uptick was expected due to energy costs. Gasoline prices fell compared to the same time last year, but not as much as the previous month, adding fuel to the headline rate. However, it’s more than prices at the pumps. Higher food prices also contributed to the inflation uptick.

The Bank of Canada tries to see through month-to-month price swings using a core inflation rate. The two core metrics most-closely tracked by the Bank (CPI-trim and CPI-median) both remained at or above 3% on a year-over-year basis for the sixth month in a row.* However, the month-over-month change in these readings (using a 3-month moving average, annualized) is in the 1-3% control range. The Bank has been saying that core inflation (using a variety of metrics) is around 2.5%, and nothing in this report will likely change that.

As for Alberta, the inflation rate crept higher from 1.4% to 1.9%, but stayed below the national average for the 6th straight month. The story here is energy prices. Natural gas prices and, to a lesser extent, gasoline prices fell faster on a year-over-year basis than national trends. The annual inflation rate excluding energy in Alberta was 2.8%, roughly matching Canada’s 2.7%

The Bank of Canada is in a tricky spot ahead of next week’s interest rate announcement. Today’s inflation reading combined with the surprisingly brisk September jobs report increases the odds that a cut gets pushed out to December.

However, we still think a cut next week is justified due to the following: slack in the labour market, weakening GDP growth, the removal of Canadian counter-tariffs, and moderating growth in shelter costs. Further, the Bank of Canada’s Business Outlook Survey, released yesterday, shows businesses are expecting smaller wage gains, weak hiring, and easing inflation.

A cut next week would be an insurance cut against ongoing headwinds. A delay in cutting would be a cautious, data-dependent Bank wanting to see more progress on inflation. It’s a close call, but we will retain our forecast for a cut on October 29th.

Either way, the story on the Bank of Canada’s role at this stage of the cycle doesn’t change. The Bank is almost done cutting, and attention is now on levers outside of the Bank’s control, like kickstarting major projects. Governor Tiff Macklem has talked about “rolling up our sleeves” to make structural changes to the economy - and he’s not talking about tweaking the short-term interest rate.

*Note that these are not perfect measures, and the Bank of Canada is doing a deep dive on how to better measure underlying inflation. More on this in a future edition of The Seven.

Answer to the previous trivia question: According to the latest report from the Canadian Federation of Independent Business, the top two concerns cited by Canadian small business owners in September were insufficient demand, followed by a shortage of skilled labour.

Today’s trivia question: In Canada, small and medium size enterprises (SMEs) are defined by having how many paid employees?