The October inflation report brought unexpected headlines, with Statistics Canada reporting a year-over-year Consumer Price Index (CPI) increase to 2.0%, up from 1.6% in September. While higher than anticipated, inflation remains within the Bank of Canada’s target range, suggesting no immediate deviation from the central bank's strategy.

Shift to Smaller Rate Cuts Expected

The Bank of Canada’s upcoming interest rate decision in December is now widely expected to result in a smaller quarter-point cut, rather than the previously anticipated half-point reduction. While less aggressive, recent rate cuts are already delivering measurable results in stabilizing the economy.

Encouraging Economic Indicators

Two key drivers of inflation—mortgage interest costs and rental inflation—declined in October, indicating relief for Canadian households. Retail sales have also shown resilience, rising for the fourth consecutive month in September by 0.4% from August, with preliminary estimates suggesting a further 0.7% increase in October. This momentum would mark a near 1% quarterly growth in retail sales, reversing the contraction observed in the first half of 2024.

Potential Boost from Government Policies

Consumer spending could receive an additional lift if the federal government implements its proposed “GST holiday” and a $250 per worker stimulus plan. However, market analysts caution that these measures may have inflationary effects, prompting the Bank of Canada to proceed cautiously with further rate cuts.

Looking Ahead

As inflation stabilizes and economic indicators improve, Canadians may experience a gradual recovery in household finances. However, the interplay between fiscal stimulus and monetary policy will remain crucial in shaping the economy’s trajectory into 2025.