SKN | RBC Forecasts Canadian Inflation to Ease to 3% Ahead of December Bank of Canada Decision

Key Takeaways:

• RBC economists expect Canada’s headline inflation to ease to 3.0% year over year in October, compared with 3.1% in September.
• Core CPI is forecast to decline from 2.1% to 1.9%, while the Bank of Canada’s preferred CPI-trim and CPI-median measures are expected to remain unchanged.
• RBC’s base case remains a December interest rate increase to 2.75%, although economists describe the outlook as a low-conviction forecast amid softer economic data.

Canadian Inflation Expected to Ease in October

Royal Bank of Canada economists expect Canadian inflation to moderate slightly in October, with the upcoming Consumer Price Index (CPI) release representing the final major inflation update before the Bank of Canada’s December monetary policy decision.

RBC Senior Economist Claire Fan and Economist Abbey Xu forecast headline CPI growth of 3.0% year over year, down from 3.1% in September.

Energy prices remained relatively stable between September and October but were still considerably higher than a year earlier. Food inflation, meanwhile, had moderated to approximately 2% and is expected to have changed little during the reporting period.

The projected decline suggests a modest improvement in headline inflation, although the broader price environment remains important as policymakers assess whether inflationary pressures are becoming more persistent.

Core Inflation Signals Gradual Moderation

Excluding food and energy, RBC expects core CPI to ease from 2.1% to 1.9% in October.

The Bank of Canada’s two preferred underlying inflation measures, CPI-trim and CPI-median, are forecast to remain unchanged year over year following a relatively moderate monthly increase of 0.2%.

RBC also expects its inflation diffusion index to remain relatively narrow. The measure tracks the proportion of consumer basket components experiencing unusually high inflation and provides insight into whether price pressures are spreading across the economy.

The economists see limited evidence so far of energy-related inflation spreading into other consumer categories, apart from inter-city transportation.

However, they caution that the current evidence does not eliminate the possibility of broader price increases emerging later. Producer-level data has indicated a significant widening in the scope of cost pressures, which could gradually pass through supply chains and eventually affect consumer prices.

December Rate Hike Remains RBC’s Base Case

Despite the anticipated moderation in inflation, RBC continues to expect the Bank of Canada to increase its overnight interest rate in December to 2.75%, the midpoint of the central bank’s estimated neutral range.

The forecast is not without uncertainty. Fan and Xu describe the case for a December increase as less than definitive, noting that economic indicators released since the Bank of Canada’s previous meeting have generally weakened.

Lower domestic gasoline prices in November provide another factor that could reduce near-term inflationary pressure. Gasoline prices have moved closer to March levels as oil prices and refining margins normalize.

Nevertheless, the potential delayed impact of producer-level cost increases complicates the outlook. Businesses may continue passing higher input costs through supply chains, creating additional pressure on consumer prices in subsequent months.

RBC therefore maintains its December rate-hike forecast while acknowledging that the supporting economic evidence remains mixed.

Closing Insights

Canada’s October inflation report could play an important role in shaping expectations ahead of the Bank of Canada’s December policy meeting.

RBC’s forecast points to modest moderation in headline and core inflation, while the central bank’s preferred underlying measures are expected to remain stable. At the same time, producer-level cost pressures and the possibility of delayed price increases suggest that inflation risks have not entirely disappeared.

For financial markets, the central issue is whether the latest inflation and economic data provide sufficient justification for another rate increase. RBC continues to favor a move to 2.75%, but its low-conviction assessment highlights the uncertainty surrounding the policy outlook.

The December decision will ultimately depend on how policymakers interpret incoming inflation data, domestic economic activity and the persistence of underlying price pressures.

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