Canada’s inflation data, business survey on tap ahead of BoC decision

Key arguments

• Headline CPI expected to stay at 3% y/y for a third month, driven by gasoline and furnace oil; food inflation should keep moderating.
• Core inflation likely edged down to 1.8% from 2.1%, with limited energy pass-through outside airfares; transportation categories are the watch point.
• RBC's CPI diffusion index shows narrow breadth—35% of the basket above 3% in August versus 54% a year earlier—though industrial producer prices show a concerning spread.
• Q3 Business Outlook Survey likely reflects weaker sentiment and higher short-term inflation expectations, with medium- to long-term expectations still near the 2% target.

Corresponding source evidence

1. Canadian inflation data and the Bank of Canada’s Q3 Business Outlook Survey on Monday will be watched closely for signs on whether inflation pressures from persistently elevated energy prices are broadening and permeating across the economy.
2. These releases will serve as key inputs for the BoC’s next interest rate decision on Oct. 28, as policymakers are wary that high oil prices could spill beyond gasoline prices into non-energy components and/or feed into rising business and consumer inflation expectations.
3. Inflation risks, however, must be balanced against a gradually improving economy that remains soft.