Tuesday’s Canadian CPI data marked the first time in six months that inflation has exceeded the Bank of Canada’s (BoC) target of 2%.

Headline and Core CPI Higher than Expected

The reading was above the market estimate of 2.3%.

Monthly, inflation rose to 0.1% in September after a 0.1% decline in August, which matched the market estimate. Higher prices for transportation and food pushed inflation higher in September.

The average of two of the Bank of Canada’s core measures of inflation eased slightly to 3.15% year-on-year in September, compared to 3.25% in August. Still, this was above the market estimate of an average of 3.0%. Core CPI excludes food and energy items and is considered a more reliable indicator of inflation trends than headline CPI.

The Inflation Report Complicates a BoC Rate Cut

Tuesday’s inflation report was hotter than expected and that could add some drama when the Bank of Canada meets on October 29. The BoC lowered rates by a quarter-point in September to 2.50%, but the Bank has been cautious as that cut was only the second reduction this year.

The markets had expected the BoC to lower rates at next week’s meeting but the surprisingly hot inflation report has lowered expectations for a rate cut to 77%, down from 87% just prior to the inflation report.

The BoC decided to lower rates in September as weak growth and employment worries outweighed concerns about higher inflation due to US tariffs. Canada’s economy contracted by 1.6% in the second quarter, as exports to the US were sharply lower and unemployment has risen to 7.1%.

A rate cut next week would provide a badly-needed boost to the weak economy but the sharp jump in headline inflation cannot be ignored. The BoC might decide to take a pause and maintain rates at next week’s meeting and wait for fresh inflation data before deciding on another rate cut.

Canadian Dollar Calm, Stock Market Sharply Lower

The inflation report has not caused much movement in the Canadian Dollar, which is having a quiet day on Tuesday. The USD/CAD currency pair is trading at $1.4027, down 0.10% on the day. The Canadian dollar remains under pressure and has posted four straight losing weeks against its US counterpart, declining as much as 2.1% during that period.

The benchmark Canadian index, the S&P/TSX, opened a short time ago and has recorded sharp losses, reversing directions after strong gains a day earlier. The index is down 474 points (1.5%) at 29,942.

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