Economists optimistic interest rates will remain unchanged

Energy prices are driving inflation. The Canadian consumer price index for September was up 0.4% on the headline to an average annual rate of 2.7%. Gas prices were up 6.0% in September and fuel oil soared 16.0%. “Even with the uptick, inflation is still below the 3% peak seen a few times earlier in the year,” says BMO Nesbitt Burns chief economist Sherry Cooper. “We may revisit that peak in the months ahead, however, as some very favourable CPI readings late last year will fall out of the calculation.”

Core inflation remains restrained however, despite the energy spike. Inflation is running stronger in the U.S., says CIBC World Markets analysts, because of services. “In the U.S. service sector, tighter labour and housing markets are pushing up prices, unchecked by the productivity boom that is focused on goods, or by low import prices.”

Market reaction is expected to be rather muted. CIBC says a low core CPI rate is a negative for the Canadian dollar, noting that the loonie did indeed drop after the release of the data.

“We had expected core CPI to drift up to 2% by early next year, but it seems like the timetable for that move is continually set back. Even so, the three month trend shows core CPI running at 1.8%, so as low 1999 figures drop out of the calculations, we would still expect to see higher core readings ahead,” says CIBC.

BMO’s Cooper takes a softer line: “The ongoing surge in energy prices is simply not translating into higher prices elsewhere. Core inflation remains remarkably stable, helping keep the Bank of Canada on hold.”