Economic Calendar
Canada Inflation Set to Cool Again, But Core Pressures May Keep Bank of Canada Cautious
Canada’s inflation data due tonight is expected to show a slower pace of price growth, offering a potential sign that the Bank of Canada is making progress in its battle to return inflation to target. Headline price gains in October are projected to ease, helped largely by a meaningful pullback in energy prices. Gasoline costs fell sharply during the month and are expected to be the main driver behind the moderation in consumer prices. Despite this expected cooling in the headline measure, core inflation is still anticipated to remain near the upper boundary of the central bank’s 1-3% target band, suggesting underlying price pressures are not yet fully resolved.
Headline inflation has been running at an annualized pace of 3.6% this year, above the 2-4% average pace recorded from January through September. The Bank of Canada has repeatedly emphasized that it is focusing more on core inflation rather than the headline figure, and while core measures are currently a little above 3%, officials have suggested that underlying pressures are now trending closer to 2.5% percent. If tonight’s release shows continued stability or improvement in core readings, it may strengthen the view that inflation is gradually aligning with the central bank’s objective.
Forecasters expect the headline Consumer Price Index to ease to around 2.1% y/y. The drag from energy prices is likely to dominate the monthly movement, while food inflation is expected to remain near last month’s pace. Core inflation measures are expected to show less progress. Price growth excluding food and energy is projected to hold near 2-4%, with the Bank of Canada’s preferred measures, CPI-trim and CPI-median, likely staying close to 3%. This is a level that does not signal price stability but does reflect gradual cooling from the more intense inflation pressures seen in the previous year.
The inflation release comes ahead of a meaningful run of Canadian data next week, including updates on household spending, housing market activity, and retail sales. Statistics Canada has already signalled that retail spending likely contracted in September, reversing much of August’s gain. Even so, consumer activity through the third quarter appears to have maintained modest positive momentum, supported by card-spending indicators showing that households are cautious but still spending.
The Canadian dollar could see significant movement following the data. If inflation comes in below expectations, particularly if core measures show convincing moderation, markets may increase speculation that the Bank of Canada could consider rate cuts earlier in 2025. In such a scenario, the currency may weaken as rate-cut expectations grow and yield spreads move against the Canadian dollar. However, if inflation once again surprises on the upside, particularly in core readings, markets may push back expectations for policy easing. This would likely support a stronger loonie, as traders position for interest rates to stay higher for longer.
Whether tonight’s data ultimately shifts the Bank of Canada’s policy stance remains uncertain. While a softer inflation print would be welcomed, policymakers have signalled that they need clear and sustained progress toward the 2% target before considering rate cuts. One month of improvement, especially if driven mostly by volatile components like energy, may not be enough to alter the tone of the next monetary policy statement. Still, continued evidence that underlying inflation is drifting closer to 2.5% could reinforce confidence that the disinflation process is intact, allowing the Bank to adopt a more balanced or less restrictive communications approach.
Analysis by Coach Angel
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