RBC forecasts October CPI will ease, setting the stage for December’s Bank of Canada rate call
Royal Bank of Canada (RBC) economists are forecasting a slight dip in Canadian inflation for October, with the upcoming data release positioned as the final major read on consumer prices ahead of the Bank of Canada’s (BoC) December interest rate decision.
In a research note, Claire Fan, Senior Economist at Royal Bank of Canada in Toronto, and Abbey Xu, Economist at Royal Bank of Canada, project headline Consumer Price Index (CPI) growth to ease modestly to 3% year-over-year, down from 3.1% in September.
Energy prices held largely flat between September and October but remained well above year-ago levels.
Food inflation, which has cooled to near 2%, is expected to have shifted little over the same period.
Read more: Bank of Canada weighed two paths before raising rates to 2.5%
Core price pressures show signs of easing
Stripping out food and energy, RBC expects core CPI to tick down from 2.1% to 1.9% in October.
The BoC’s two preferred measures — CPI-trim and CPI-median — are forecast to hold at the same year-over-year rate after a benign 0.2% monthly gain.
On the breadth of inflation, the report noted that the diffusion index used by RBC to track the share of consumer basket items seeing abnormally high inflation “is expected to have remained relatively narrow, pointing to limited spillover from energy to other components of consumer prices outside inter-city transport.”
Even so, the economists cautioned that “limited evidence to date does not rule out the potential for more significant spillover in the future.”
Read more: What Canada's latest inflation reading means for mortgages
The case for a December hike — and the doubts
RBC’s base case remains a December rate hike to bring the overnight rate to 2.75%, the midpoint of the BoC’s estimated neutral range.
Yet the report was candid about uncertainty. “The case for a December hike is not a slam dunk,” Fan and Xu wrote, adding that “economic data since their last meeting has mostly turned softer.”
The analysts noted that “domestic gasoline prices have fallen significantly in November, back closer to levels in March as oil prices and refining margins both normalize” — removing one source of near-term upward pressure.
Despite that, the report warned that producer-level data “has pointed to a significant widening in scope, which will likely continue to trickle through supply chains before showing up in consumer prices with a lag.”
RBC’s bottom line: “Our base case remains a low conviction hike in December.”
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