Inflation cools to 3.8% in September. What that means for the Bank ...

Inflation cooled to 3.8 per cent nationally last month, Statistics Canada said Tuesday, down from 4.0 per cent in August and snapping a streak of two consecutive monthly accelerations.

The annual rate of inflation saw a “broad-based” slowdown in September amid signs of continuing relief at the grocery store, the agency said.

StatCan said Canadians saw price at the grocery store rise 5.8 per cent in September, cooling from the 6.9 per cent increase in August.

Price growth for meat, dairy products, vegetables and coffee and tea all decelerated month-to-month, though edible fats and oils, bakery products, fish and fresh fruit saw costs rise quicker.

Higher costs for mortgages and rents were the main factors fuelling inflation in the month, StatCan said.

At the fuel pumps, gasoline prices rose 7.5 per cent year-over-year, but they declined slightly on a monthly basis, according to the agency.

Canadians also saw outright declines in the cost of airfare in the month, with prices down 21.1 per cent year-over-year. StatCan noted the price drop coincided with a gradual increase in flights on offer from airlines over the past year.

Canadians also saw prices drop annually on durable goods including furniture and appliances. New passenger vehicles saw prices grow at a slower rate in September, which StatCan attributed to better stock for new cars in the market.

The Bank of Canada is set to make another interest rate decision on Oct. 25. with the inflation print marking one of the final data releases for policymakers before next week’s rate call.

Inflation has proved stubborn in recent months, rising in July and August after hitting a low of 2.8 per cent in June. The Bank of Canada has expressed concern that despite progress to date on taming price pressures, annual inflation could get stuck above the central bank’s two per cent target.

The central bank’s closely watched metrics of core inflations cooled slightly last month, StatCan noted.

RBC economist Claire Fan called the September inflation report a “step in the right direction” for the Bank of Canada’s efforts to restore price stability.

The central bank has rapidly raised its benchmark interest rate by 4.75 percentage points since March 2022, but economists generally say it takes between a year and 18 months for the economy to fully absorb the impact of higher rates.

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Fan said in a note to clients Tuesday that the lagged effect of higher rates will continue to put downward pressure on inflation, as consumers have to put more money aside to pay down debt and businesses are forced to rein in price hikes to stay competitive.

“With more easing in inflation readings expected in the months ahead, we expect the Bank of Canada to stay on pause through the rest of the year,” she wrote.

A pair of Bank of Canada surveys released on Monday also show that higher interest rates are starting to bite on businesses and consumers alike, pushing firms to scale down their sales forecasts in the year ahead.

Gross domestic product data also shows the Canadian economy has effectively stalled in recent months.

Benjamin Reitzes, BMO’s managing director of rates and macro strategist, said in a note on Tuesday that the cooling in the economy and signs of weakness in the Bank of Canada’s own surveys indicate that the central bank can remain on hold for the rest of this cycle and let the slowing trends play out to tamp down inflation.

“Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we’re likely to see ongoing disinflationary pressure,” he said.

“There’s no need for further rate hikes in Canada.”

Money markets trimmed bets for a rate hike next week after the inflation data came out. They now see a 23 per cent chance for a rate increase next week, down from 43 per cent before the figures, according to Reuters.

— with files from Reuters