2024-10-16 05:06:00
Price growth was limited to 1.6% in September, its weakest growth in three years. Inflation has now fallen below the Bank of Canada’s 2% target, which is both good and bad news.
Posted at 1:06 a.m.
Updated at 5:00 a.m.
The good news is that the September figures confirm that the problem of generalized inflation is now resolved and that interest rates will continue to fall, at a faster pace, according to National Bank economist Matthieu Arseneau.
“The Canadian economy needs oxygen from the central bank to stabilize,” he analyzes. We expect a 50 basis point cut in the policy rate in October and another of the same magnitude in December. »
The bad news is that fears that inflation will fall too low are starting to materialize. The absence of inflation, or the general decline in prices known as deflation, discourages investors from investing because they do not get a return, and does not encourage consumers to spend because they wait for prices fall even further.
“Someone who wants to buy a car will delay their purchase if they know that its price will decrease,” illustrates Jocelyn Paquet, economist at the National Bank. This sets off a vicious circle that paralyzes the economy. »
Inflation, when controlled, benefits the economy by pushing investors to invest and consumers to spend. An inflation target of 2% is considered adequate by most countries1.
The Bank of Canada is concerned about the possibility that inflation, which peaked at 8.1% in the country in June 2022, could fall too much. “We must increasingly protect ourselves against the risk that the economy and inflation slow down too much,” warned the Governor of the Bank of Canada, Tiff Macklem, when announcing the latest reduction in the key rate, the September 4.
PHOTO BLAIR GABLE, REUTERS
Bank of Canada Governor Tiff Macklem
“We are determined to bring inflation back to the 2% target and we want it to stay there. We do not want it to be higher or lower than this target, because the economy works well when inflation is around 2%,” the governor said.
Under the target
Inflation fell from 2% in August to 1.6% in September, below the Bank of Canada’s 2% target. Should we fear deflation?
“We cannot rule out this possibility, but it is not in our scenario,” says Benoit Durocher, economist at Desjardins.
This scenario predicts that the inflation rate will remain around 2%, half of which will come from the cost of housing which will continue to increase.
“In the short and medium term, this is not a big concern,” also believes Jocelyn Paquet, of the National Bank. However, he does not rule out the possibility that the consumer price index (CPI) could spend a few months below the Bank of Canada’s target and even below the 1% mark, under the influence of temporary factors.
The decline in the CPI in September is mainly explained by one of these temporary factors, namely the drop in gasoline prices, according to Statistics Canada.
Year over year, the price of gasoline is down 10.7% in September, after falling 5.1% in August. Excluding gasoline, the CPI was up 2.2% in September.
The core inflation measures that the Bank of Canada monitors and which exclude the most volatile prices remain around the target, at 2.1%.
Rents and food prices continue to rise and fuel inflation. Rents are up 8.2%, after an increase of 8.9% in August.
In grocery stores, prices are up 2.4%, an increase greater than the overall CPI. The prices of beef, oil and eggs increased the most. Prices in restaurants are up 3.5%.
In Quebec, inflation increased from 1.5% in August to 1.3% in September.
The September inflation report is the last before the Bank of Canada’s next rate decision next week. The larger-than-expected decline in the CPI lends credence to economists who expect the central bank to accelerate rate cuts, cutting its key rate by 50 basis points.
The Bank of Canada has already reduced its key rate three times, by 25 basis points each time. It went from 5% to 4.25%.
1. Read “Why 2%”
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