Surprisingly hot Canada inflation of 6.9% adds to rate pressure

CANADA’S inflation rate came in stronger than expected in September despite lower petrol prices, with stickier underlying pressures likely to keep the Bank of Canada on an aggressive rate-hiking path.

The consumer price index was up 6.9 per cent from a year ago, higher than economist predictions for a 6.7 per cent gain, Statistics Canada reported on Wednesday (Oct 19) in Ottawa. During the month of September, prices unexpectedly rose 0.1 per cent versus expectations for a 0.1 per cent decline.

Annual inflation nonetheless slowed for a third month, down from 7 per cent in August, 7.6 per cent in July and a four-decade high of 8.1 per cent in June.

So-called core inflation - which excludes more volatile prices to generate a better gauge of underlying pressures - remained elevated. The average of the Bank of Canada’s three core measures was 5.3 per cent, matching a revised number for August.

Before Wednesday’s report, traders were fully pricing in a 50-basis-point interest rate increase at the next policy decision on Oct 26, with a possibility of a three-quarter point hike. The upside inflation surprise may prompt investors to firm up their bets on a more aggressive move. governor Tiff Macklem and his officials have already increased borrowing costs by three percentage points since March, bringing the benchmark overnight lending rate to 3.25 per cent.

While Canadians got some reprieve at the gas pump, the data show they continued to feel the pinch when filling their fridge. Rising prices for food - including meat, bakery products and vegetables - highlight how weakness in the Canadian US dollar complicates the outlook for inflation.

Prices for food purchased from stores grew 11.4 per cent, the fastest year-over-year pace since August 1981. Those prices have been increasing at a faster rate than overall inflation for 10 consecutive months.

Mortgage interest costs continued to put upward pressure overall inflation in September as Canadians renewed or initiated loans at higher rates, the statistics agency said.

While lower gas prices slowed goods inflation, the cost of services accelerated to 5.6 per cent from 5.5 per cent.

Average hourly wages rose 5.2 per cent on a year-over-year basis last month, meaning that prices are still rising faster than paychecks, the agency said. The gap in September was larger than in August. BLOOMBERG