Measures of core inflation exceeded expectations in the latest economic data, with the consumer price index recording a significant rise. The annual rate of the index increased from 2.3% to 2.5%, and these rises exceeded all expectations expected by analysts, highlighting the ongoing inflation trends in the economy.
Gasoline prices saw a smaller decline in October by 4.0% compared to a 10.7% decline in September. On the other hand, the consumer price index for all items except gasoline rose by 2.2%, the same growth rate recorded in August and September.
Commodity prices increased slightly by 0.1% year-on-year in October, following a 1.0% decline in September, while the pace of increase in prices of services slowed and rose by 3.6%, marking the smallest annual increase since January 2022. Over the past three years, the prices of goods have increased by 10.2%, while the prices of services have increased by 14.2%.
On a monthly basis, the consumer price index increased by 0.4% in October, following a decline of 0.4% in September. The seasonally adjusted CPI rose 0.3% m/m.
Low prices of gasoline on an annual basis:
Despite the smaller decline in gasoline prices of 4.0% in October compared to 10.7% in September, this slowdown is partly due to the impact of the base year. Monthly prices in October fell by 6.4% as a result of lower refining margins and weaker global oil demand. On a monthly basis, gasoline prices rose 0.7% in October, following a sharp decline of 7.1% in September.
Slowing shelter price growth:
The shelter price increase continued to slow in October, rising 4.8% year-on-year, compared to a 5.0% increase in September. The pace of mortgage interest rate growth also slowed, which rose 14.7% in October compared to 16.7% in September.
The impact of the Canadian dollar average consumer price index on decisions made by the Bank of Canada
Changes in the average Canadian CPI can significantly influence the Bank of Canada’s interest rate decisions for several reasons:
Inflation targeting: The Bank of Canada operates within an inflation-targeting framework, usually aiming for a 2% inflation rate. If the average CPI shows a steady increase above this target, it could prompt the bank to consider raising interest rates to curb inflation.
Core inflation trends: The average CPI provides insights into underlying inflation pressures by filtering out the most volatile components of the CPI (e.g. food and energy). If the average CPI is rising, this indicates persistent inflationary pressures, which could prompt the bank to tighten monetary policy.
Market outlook: Changes in the average CPI can shape market expectations regarding future interest rate increases. If the data points to higher inflation, investors may expect the bank to act, affecting bond yields and the value of the Canadian dollar.
Economic growth considerations: The Bank of Canada must balance inflation control with the need to support economic growth. If the average CPI is rising but economic growth is weak, the bank may be more cautious in raising interest rates to avoid a halt to the economy.
Communication Strategy: The bank uses the average consumer price index in its communications to provide clarity on inflation expectations. Significant changes in this indicator could lead to adjustments in the Bank’s future guidance regarding future interest rate paths.
In short, fluctuations in the average Canadian dollar CPI are closely monitored by the Bank of Canada because they are useful in its assessment of inflation dynamics, influencing monetary policy decisions aimed at maintaining price stability while supporting economic growth.
Comparison of the average consumer price index with other inflation measures
The average CPI, core CPI, and headline CPI are important measures of inflation, but they differ in their calculations and implications. Here is a comparative analysis:
- 1. Key Consumer Price Index
- Definition: The headline consumer price index measures the overall change in the prices of a basket of goods and services, including all items such as food and energy.
- Volatility: It is often subject to greater volatility due to fluctuations in food and energy prices, which can distort the overall inflation picture.
- Usage: The headline consumer price index provides an overview of inflation, reflecting the cost of living for consumers.
- 2. Core CPI
- Definition: The core CPI excludes the most volatile categories, especially food and energy prices, to provide a clearer view of underlying inflation trends.
- Stability: By removing these elements, the core CPI tends to be more stable than the headline CPI, making it a preferred measure of long-term inflation trends.
- Usage: Often used by policymakers and economists to gauge persistent inflationary pressures and guide monetary policy.
- 3. Average CPI
- Definition: The average CPI calculates the change in prices by identifying the average change in prices across all elements, effectively filtering out extreme price movements.
- Unique feature: This method allows it to capture the central trend of price changes, providing a stable measure of inflation that is less affected by outliers.
- Usage: The average CPI is particularly valuable for assessing inflation expectations and can provide insights into the direction of overall inflation without the noise of extreme price changes.
- Volatility: The headline CPI is the most volatile, followed by the core CPI, where the average CPI is the least affected by extreme changes.
