The October inflation report caused a minor commotion but it does not appear to have upset things enough to see the Bank of Canada change course.

Statistics Canada reports headline inflation, also known as the Consumer Price Index, rose to 2.0%, on a year-over-year basis, up from 1.6% in September.  An increase was expected, but the October bump was bigger than forecast.  Still, inflation remains in the central bank’s sweet spot.

It is now widely expected that the Bank of Canada’s next interest rate setting, in December, will see a quarter point cut, rather than another half point reduction.

Even with less aggressive action by the BoC there is evidence that the rate cuts are working.

Two key drivers of inflation – mortgage interest costs and rent inflation – were down in October and in September, retail sales rose for the fourth straight month, increasing by 0.4% over August.  Statistics Canada’s flash forecast for October is predicting a 0.7% increase.  That would boost third-quarter retail sales by nearly a full percentage point, reversing a significant contraction in the first half of this year.

A further spending increase can be expected if the prime minister’s proposed “GST Holiday” and $250-per-worker stimulus plan is implemented.  Some market watchers are concerned the scheme could be inflationary.  They say that could keep the BoC on a slower, rate cutting schedule.

Published by First National Financial LP