Canada CPI inflation falls to 3.8% in September vs. 4% forecast

Inflation in Canada, as measured by the change in the Consumer Price Index (CPI), declined to 3.8% on a yearly basis in September from 4% in August. This reading came in below the market expectation of 4%. 

On a monthly basis, the CPI declined 0.1%, following the 0.4% increase recorded in August. 

In the meantime, the Bank of Canada's (BoC) annual Core CPI, which excludes volatile food and energy prices, increased 2.8%, compared to 3.3% in August.

"The year-over-year deceleration was broad-based, stemming from lower prices for some travel-related services, durable goods and groceries," Statistics Canada noted in its press release. "Offsetting the deceleration in the all-items CPI was a year-over-year increase in gasoline prices, which rose at a faster pace in September (+7.5%) compared with August (+0.8%) due to a base-year effect."

Market reaction to Canada inflation data

Soft inflation data weighed on the Canadian Dollar with the immediate reaction. At the time of press, the USD/CAD pair was up 0.55% on the day at 1.3685.

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This section below was published as a preview of Canada Consumer Price Index data at 08:00 GMT.

• The Canadian Consumer Price Index is foreseen at 4% YoY in September.
• Bank of Canada Core CPI has been on the rise, although currently at 3.3% YoY.
• The BoC paused rate hikes after reaching 5%, the highest in 22 years.

Canada will release inflation-related data on Tuesday, October 17. Statistics Canada will publish the September Consumer Price Index (CPI), which is foreseen to increase 4% YoY,  the same pace it rose in August. On a monthly basis, price pressures are seen up by 0.1%, declining from the previous 0.4% increase.

Additionally, the Bank of Canada (BoC) will publish the Consumer Price Index Core, which excludes the most volatile components such as food and energy prices. In August, the annual BoC core CPI increased by 0.1% MoM and 3.3% YoY. As usual, the figures will be closely watched for the Canadian Dollar (CAD) potential direction.

Inflation in Canada, as measured by the change in the CPI, rose to 4% on a yearly basis in August from 3.3% in July. On a monthly basis, the CPI rose 0.4%, surpassing the market’s estimates of a 0.2% increase. 

What to expect from Canada’s inflation rate?

The BoC has battled skyrocketing inflation by hiking the policy rate to the current 5%, the highest in over two decades. Still, policymakers held the key interest rate steady when they met in September amid signs of a weakening economy. 

Nevertheless, the central bank’s statement showed policymakers will monitor incoming economic data and assess whether rates need to rise further, wary of indicating the end of the tightening cycle. Additionally, the statement read: "They [policymakers] agreed that they did not want to raise expectations of a near-term reduction in interest rates."

Finally, the BoC reiterated it is concerned that underlying inflation is not moving down fast enough. In fact, core measures of inflation accelerated last month, as it happened in other major economies. 

With that in mind, higher-than-anticipated readings for September could fuel speculation the BoC may opt for another rate hike in the near future.

Speaking at the International Monetary Fund (IMF) over the weekend, BoC Governor Tiff Macklem expressed concerns about geopolitical unrest in the Middle East affecting inflationary levels. He also noted that the fight against inflation “is not over,” although he added he is not expecting a recession. Finally, and opposing his American counterparts, he said that surging bond yields may not be a substitute for further rate hikes.

How could the Consumer Price Index data affect USD/CAD?

Usually, mounting inflationary pressures tend to boost the local currency as it suggests the central bank will turn more hawkish. However, the BoC, like most of its counterparts, has been extremely aggressive for roughly a year and a half in an effort to bring inflation down from the multi-decade highs achieved in mid-2022. And despite Governor Macklem's words, fears of a recession pend over all economies amid the truculent monetary tightening. 

Last week, the US Dollar soared after the local CPI rose by more than anticipated amid risk-off flows. With that in mind, USD/CAD may edge lower if Canadian inflation figures come in much higher than anticipated, suggesting the BoC will need to act more. 

USD/CAD bottomed for 2023 at 1.3092 in July, recovering afterwards to reach 1.3785 in early October. The pair trades a handful of pips above the 1.3600 mark heading into the release of the Consumer Price Index, easing amid decreased demand for safety. 

The Canadian Dollar advances against its American counterpart for a second consecutive day, although the technical picture is far from bearish. USD/CAD daily chart shows a bullish 20-day Simple Moving Average (SMA) advancing well above directionless 100-day and 200-day SMAs. At the same time, technical indicators have lost their bullish momentum but hold above their midlines, limiting the scope for a bearish run. 

USD/CAD established a minimum of 1.3568 in the previous week, and sellers will likely become more courageous on a break below the level. The next relevant support area comes at around 1.3520, a potential downward target should the CAD surge with the news. 

On the upside, bulls will likely retake control of the pair if it runs past 1.3700. An intermediate resistance can be found at around 1.3750, en route to the aforementioned 1.3785 multi-month high seen in early October.