Canada’s Inflation Rate Unexpectedly Jumps to 2.0%

Canada’s inflation rate unexpectedly jumped to 2.0% in October from 1.6% in September. Analysts were expecting Canada’s inflation rate to climb in October to 1.9%. Every month, Canadian inflation inched up 0.4%, versus expectations for a 0.3% gain. It was also the first time since May that Canadian inflation increased.

Statistics Canada said the higher-than-expected increase in inflation is a result of the base-year effects of gasoline prices. Grocery prices were also up more than overall inflation, rising 2.7% in October. Going back to August, this is the third consecutive reading with grocery prices surpassing the average.

That inflationary pressure on groceries is expected to continue into 2025. Canadians are used to fresh produce being more expensive in the cold months, but with the Canadian dollar trading at a four-year low to the U.S. dollar, those seasonal prices climb even higher.

The Bank of Canada has cut interest rates four consecutive times since June to curb inflation. In October, the Bank of Canada cut its key interest rate by 50 basis points to 3.75%. The central bank noted that it would continue to lower interest rates should the Canadian economy remain weak.

In fact, in October Tiff Macklem, Bank of Canada Governor, said “With inflation staying close to two percent, Canadians don’t have to worry about big changes in their cost of living. Yes, they’ve got lots of other things to worry about. This is one less thing to worry about.”

What Will the Bank of Canada Do When It Meets in December?

Despite inflation ticking up to 2.0% in October, the overall outlook on the Canadian economy hasn’t changed much. Inflation has come down significantly over the last two years and economic growth remains anemic. The central bank’s key overnight lending interest rate of 3.75% is still too high for where we’re at in the economic cycle.

At the very least, this points to continued interest rate cuts into 2025. The Bank of Canada has said it will continue to cut interest rates to get borrowing costs down to a level that encourages consumer spending and business investment.

The big question is about the size and pace of those interest rate cuts. October’s bigger-than-expected annual increase in inflation has lowered the odds of another oversized interest rate cut by the Bank of Canada when it meets next on December 11.

While some economists think the central bank should still cut interest rates by 50 basis points in December, most think it will announce a 25 basis point rate cut in December.

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