It’s a long road back to the 2% inflation target, but at least inflation moved back in the right direction in September. The Canadian annual inflation rate eased slightly to 3.8% last month, down from 4.0% in August, on broad-based declines. The reading was lower than the consensus (Bloomberg survey) of 4.0%, and comes after two consecutive increases in the headline rate in July and August.

More importantly, the Bank of Canada’s  ‘core’ inflation readings, which strip out the impact of volatile items, also shifted lower. All three of them (trim, common, and median) declined on a year-over-year basis. Recall the big news in August was an acceleration in core inflation.

Mortgage interest costs continued to add to inflation, rising 30.6% year-over-year.  While grocery price inflation is still running high at 5.8%, the rate of increase moderated more than a full point to its lowest in almost two years.

In Alberta, inflation fell from 4.3% to 3.7% on declines in most of the major categories. Alberta moved back below the national inflation rate, where it has been for almost all of 2023 (August being the exception - see chart). Energy prices added to inflation, rising at roughly the same clip last month (12.6% y/y) with an acceleration in gasoline price inflation and another large annual jump in electricity prices. Food inflation eased, though there was another notable increase in prices for rented accommodation. The core (ex food and energy) inflation rate fell to 2.5%—it’s lowest rate since January 2022.

With its final inflation reading in hand, the Bank makes its rate decision next week (October 25). There is clear evidence that past rate hikes have cooled the economy: GDP has stalled and the outlook was soured based on yesterday’s Business Outlook Survey. The economy is clearly shaking off the ‘excess demand’ the Bank says is contributing to inflation.

The Bank has telegraphed, through recent comments and the summary of deliberations, that it would tighten again if necessary if inflation doesn’t cooperate. While inflation expectations remain persistently high, today’s inflation reading is reassuring.

Overall, this report along with clear signs of an economic slowdown should keep the Bank on the sidelines next week. But it won’t be in any rush to lower rates and our base case is that the Bank keeps its policy rate at current levels until mid-2024.