Canada's hotter than expected inflation reading sets stage for another rate hike

Canada's latest reading on inflation came in hotter than expected as the cost of groceries continued to climb at the fastest pace in decades, setting the stage for another sizeable interest rate hike next week.

In its latest consumer price index report, Statistics Canada said the country's annual inflation rate in September dropped slightly to 6.9% from 7.0% in August.

The federal agency attributed the slower pace of price growth to lower gas prices. Prices at the pump fell by 7.4% in September from August.

In a note, BMO chief economist Douglas Porter said the deceleration in headline inflation was smaller than what was expected.

"Bluntly, inflation did not ease as much as anticipated last month, even as gasoline costs took a big step back,'' he said.

Grocery prices rose at the fastest rate since August 1981, with prices up 11.4% compared with a year ago. That's up from the previous month's annual rate of 10.8% and the 10th straight month that food prices have outstripped the overall inflation rate.

Statistics Canada said on a year-over-year basis, Canadians paid more for items such as meat, which was up 7.6%, dairy products, which rose 9.7%, bakery products, which rose 14.8%, and fresh vegetables which were up 11.8%.

Canadians also paid a lot more for fresh fruit, which was up 12.7%, coffee and tea, which were up 16.4%, seafood, which rose 7.6%, non-alcoholic beverages, which were up 14.7%, and cereal products, excluding baby food, which rose 17.9%.

The federal agency said the rapidly rising grocery prices are due to weather conditions, higher prices for fertilizer and natural gas and the Russian invasion of Ukraine.

Excluding food and energy, prices rose by 5.4% year-over-year, a slight acceleration compared with August.

Wages continue to grow, though at a slower rate than prices, with average wages were up 5.2% in September compared with a year ago.

For homeowners or prospective buyers, higher interest rates are pushing up the cost of mortgage interest, while other costs rise at a slower pace.

With September marking the start of the academic year for many students, Statistics Canada said tuition fees were up 2.3% compared with a year ago.

On a monthly basis, the consumer price index rose by 0.1%.

The slight decline in the headline inflation rate is similar to what the U.S. experienced in September, with their headline inflation rate falling from 8.3% to 8.2%.

The Bank of Canada will be monitoring the latest data on CPI ahead of its next interest rate announcement on Oct. 26, paying close attention to its preferred core measures of inflation.

According to Statistics Canada, these measures, which tend to provide less volatile readings, were unchanged from August.

The Bank of Canada is expected to deliver another interest rate increase next Wednesday, with forecasters split between a half and three-quarters of a percentage point hike.

The central bank, which has a mandate to maintain low and stable inflation, has been combating high inflation by raising interest rates.

It has raised its key interest rate five times this year, bringing it from 0.25% to 3.25%.

The interest rate hikes feed into higher borrowing costs for Canadians and businesses, which slow spending in the economy.

The Bank of Canada is aiming to slow spending enough to bring inflation back to its two per cent target, though the full effect of these rate hikes will take time to work its way through the economy.

Still, the effect of higher interest rates is beginning to be felt in the housing market, which has been cooling after home prices reached a peak in February.

With files from Adena Ali for The Canadian Press