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Canada: Inflation Heats Up Further in October 

Consumer price inflation accelerated to 4.7% year-on-year (y/y) in October, up from 4.4% in September. Energy prices remained a key contributor to hotter inflation. Energy prices were 25.5% higher than a year ago, with gasoline prices up a whopping 41.7%. Excluding energy, prices were up 3.3% y/y, same as the pace in September.

In addition to energy, some other categories also saw faster price growth in October. Clothing and footwear prices were up 0.6% y/y from the 0.2% gain seen in September. Household operations, furnishings and equipment prices were 1.8% higher than a year ago, also marking an acceleration from September. Food and shelter prices were up by 3.8% and 4.8% respectively, matching the strong gains in the prior month.

Seasonally adjusted, month-on-month price were up 0.5%, continuing a string of strong monthly growth. Prices for recreation, reading & education rose by whopping 1.8% on the month. Shelter prices were up 0.7% with food prices posting a similar increase (+0.6%). Transportation prices increased by 1% on the month, and clothing and footwear prices posted their first monthly gain since July.

All three of the Bank of Canada’s core inflation metrics were unchanged in October. The CPI-trim was at 3.3% y/y, CPI-Median at 2.9%, and the CPI-common measure at 1.8%. Taken together, the three measures averaged 2.7%, same as in September and was at its the highest level since December 2008.

Key Implications

The temperature outside might be plunging but inflation continued to heat up in October. Energy prices remain a major contributor, but consumers are feeling the pinch seemingly everywhere: at grocery and clothing stores, car dealerships, and at home.

Supply disruptions remain acute and continue to impact a broad range of items. Today’s report flagged higher meat prices, which are up by 10% year-on-year driven by labor shortages and higher prices of feed for livestock. Prices for other items, such as recreation and clothing, continue to rise on the back of recovering consumer demand as well as higher input costs. As supply chain issues are expected to linger, inflation is likely to maintain a four handle for the remainder of this year.

The recovering economy and hot inflation will likely prompt the Bank of Canada to react and raise interest rates sooner rather than later. We expect the Bank of Canada to start raising its key interest rate in April of 2022, but cannot rule out the possibility the central bank will act earlier if the job market remains resilient and inflation keeps surprising to the upside.

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