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Canada’s inflation remained steady in September…

Inflation in Canada remained steady in September at 1.1% year-on-year. Stronger price increases for food,
shelter and alcohol and tobacco were offset primarily by a slower pace of inflation for clothing and footwear,
and transportation.

– The more important measure for monetary policy, the Bank of Canada’s core, was similarly steady at 1.3% in
September, unchanged from August.

– Statistics Canada cited that inflation was led by shelter costs in September (+1.4%). Higher inflation for shelter
versus August continues to be driven by natural gas prices and rent, whereas mortgage interest costs are 3%
lower than a year ago. It is worth noting that mortgage interest costs are becoming less of a drag on inflation
and are expected to continue to creep up in line with higher mortgage rates.

– Food prices also ticked up again to 1.2% year-on-year, up from 1.0% in August, as prices for fresh fruit and
veggies, meat and restaurant meals all accelerated.

– But, looking across the eight main price categories, it’s hard to see much evidence of increasing inflation
pressures anywhere. The only component above the Bank of Canada’s 2% target was alcoholic beverages
and tobacco products (+2.3%), which carries a very small weight in the CPI basket. Transportation inflation
ebbed to 0.8% year-on-year, as lower gasoline prices weighed against bigger price increases for buying
vehicles. Clothing and footwear inflation also faded to only 0.4% year-on-year, while prices for health and
personal care are down 0.1% versus last year.

– Provincially, the highest inflation rate continued to be Manitoba (+2.5%), which has seen larger price gains for
cigarettes and vehicle registration fees. In contrast, prices in British Columbia are flat year-on-year, held down
by deflation in food at restaurants and homeowners’ replacement cost.

Key Implications

– We now have the complete inflation picture for the third quarter, and core inflation came in at 1.3% year-onyear,
right on the Bank of Canada’s forecast. However, looking ahead, with growth in the second half of 2013
likely to disappoint the central bank’s forecast, inflation could be softer than they expect going forward.

– We expect a very slow grind upwards in core inflation from here, as more modest economic growth, intense
competition at the retail level, and very little upward pressure from wages are conspiring to keep Canadian
inflation tame. We don’t expect the Bank of Canada to see the necessity to raise interest rates for at least a
year, and possibly longer.

Article provided by Leslie Preston, Economist

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