Canada’s inflation rate fell to 1.6 per cent in September, dropping well below the Bank of Canada’s two per cent target and increasing bets that the central bank will accelerate cuts to its policy interest rate.

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The inflation reading, the smallest year-over-year increase in prices since February of 2021, has many economists now predicting that the central bank will make a 50-basis-point cut to its policy rate next week, after three consecutive 25-basis point cuts brought the rate to 4.25 per cent.

Bank of Montreal chief economist Douglas Porter said that the big improvement in inflation, coupled with an unemployment rate that remains high at 6.5 per cent, “will be enough to prompt the Bank of Canada to opt for a 50-basis-point rate cut later this month.”

In a note to clients, David Rosenberg, founder of Rosenberg Research & Associates Inc., pointed to declines in clothing prices (-4.4 per cent), telecom prices (-5.1 per cent) and motor vehicles (-1.3 per cent) as evidence that “pockets of outright deflation are emerging.”

“At 4.25 per cent, the Bank of Canada rate is still around 150-200 basis points north of neutral,” Rosenberg said. “Given where inflation and the unemployment are, the Bank of Canada is well behind the curve, and there should really be nothing to stand in the way of a 50 basis point rate cut at the Oct. 23 meeting, even with the Fed having turned a tad less dovish of late.”

The deceleration in headline inflation was driven by a drop in gasoline prices, which fell year over year by 10.7 per cent, Statistics Canada said on Tuesday. Fuel oil and other types of fuel fell by 22 per cent on a yearly basis, while the price of air transportation was also down by 4.4 per cent. On a monthly basis, overall CPI declined by 0.4 per cent, after a 0.2 per cent decline the previous month.

Core inflation measures, which the Bank of Canada prefers to when making its monetary policy decisions, remained in the target range and largely unchanged on a yearly basis. CPI-median was up by 2.3 per cent while CPI-trim rose by 2.4 per cent, both the same as in August. However, growth in CPI-common was 2.1 per cent, accelerating from a 1.9 per cent reading in August.

Last month, Bank of Canada Governor Tiff Macklem said he would not rule out steeper cuts if inflation and the economy fell more than expected. Additionally, the summary of deliberations for the central bank’s September decision showed the governing council was open to faster — or slower — rate cuts, if necessary.

Shelter inflation continued to remain sticky in September. Rental prices continued to rise, with rent inflation increasing year over year by 8.2 per cent, a deceleration from the 8.9 per cent recorded in August. Mortgage interest costs continued to be the top contributor to annual inflation, rising 16.7 per cent in September.

“To be sure, shelter costs were still growing at a faster rate comparing to the rest of the consumer basket,” said Claire Fan, an economist with the Royal Bank of Canada, in a note to clients. “But the scope of price pressure outside of shelter has now normalized more fully to what it looked like before the pandemic.”

The price of food purchased in stores continued to outpace overall inflation, increasing by 2.4 per cent in September, the same pace as in August. Food purchased in restaurants also increased by 3.5 per cent in September.

Statistics Canada noted that despite the deceleration in headline inflation, consumers continue to feel the impact of high prices for essential items. Food purchased in stores is up 20.7 per cent and rent is up 21 per cent, compared to three years ago.

• Email: jgowling@postmedia.com

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