Key points:
- Inflation came in lower than expected at 3.8%, beating expectations of an increase to 4.4%.
- For the first time in 2023, we experienced deflation, and are likely at the peak of the rate hike cycle.
- Conflict abroad means there is still some uncertainty for the future.
October 2023 inflation watch
Your October 2023 inflation watch brings some much needed good news. Not only did inflation come in lower than expected, but we actually experienced deflation for the first time in 2023. Here’s what you need to know.
Don’t feel like watching? Find the full transcript below!
Chris: [00:00:00] On October 25th, the Bank of Canada is poised to make their penultimate Bank of Canada interest rate announcement for 2023. That’s it. The year is almost done, and the market has been very split in terms of whether the bank would be forced to raise the prime rate by a quarter of a percent or hold the interest rate steady. And just yesterday, we received some critical information in the form of inflation data that cements next week’s decision. Join me as we dive a little bit deeper for this month’s inflation watch.
Deflation in the last month is a great sign
Chris: [00:00:36] There was a lot riding on this month’s CPI read regarding interest rates, and the market was expecting that headline inflation was going to increase to 4.4%, locking in this narrative that the Bank of Canada would have to raise interest rates further. But to the surprise of the entire market, inflation came in lower than anticipated at 3.8% on an annual basis. And when we look at the monthly, we actually see for the first time deflation from month to month. So from the month of August to the month of September, inflation actually went negative for the first time in 2023. We haven’t seen that happen yet this year. So that’s a great sign for the fight against inflation. And we can see those decreases month over month in five major components of the CPI calculation, which include food, household operations, furnishings and equipment, clothing and footwear, health and personal care, recreation, education and reading.
Chris: [00:01:43] Now, this weaker than expected CPI read really changes the landscape around expectations for the Bank of Canada and future interest rate movements. What I’m showing you here. It’s a maybe a messy chart, but really the point that I want to show you is the expectation, the changing expectation day by day for a Bank of Canada increase in Q4 of this year. And the high point, if you look here, was on September 19th, what happened on September 19th? That was the last CPI read for the month of August, which came in higher than anticipated. At that time, the market priced in a 100% chance that the Bank of Canada was going to have to raise the prime rate in Q4 of 2023. And in fact, it went on from there to to suggest that maybe there was a remote possibility, 12% possibility that they’d have to increase by half a percent. And then as the month went on and and we got more data and information, that probability changed day by day, trending more and more towards zero. Now, the most recent read dropped the probability from approximately 43% chance of a Bank of Canada increase this quarter to less than 30% chance.
Much uncertainty remains for the future
Chris: [00:03:07] So where exactly does that leave us with interest rates as we look forward into the new year 2024? At the moment, the market is not pricing in any rate cuts until Q3. So July through to September, October of 2024. At the same time, the market is pricing in a very low probability of an increase to interest rates. So more than likely at this point, we can start to develop a narrative that we are at the peak of the interest rate hike cycle, and we should see things start to ease and trend downward. Now, there remains a lot of uncertainty. Certainly the conflict in the Middle East and in Ukraine remain outliers that can dramatically influence global economies, including, and most importantly, oil prices. So these factors can still influence inflation and require further monetary tightening from the Bank of Canada, which can influence interest rates. But all things equal today, if I had to guess, and it’s a fool’s errand to predict, I would say that we are starting to really see the peak of interest rates, and we should start to see things start easing as we head into 2024.
Need more help or information?
Chris: [00:04:26] My name is Christopher Molder. I’m a Toronto mortgage broker. And this concludes your October inflation watch video. If you found any value in today’s video, please consider liking and subscribing. It helps me to create more content and to know that you’re enjoying this. Until next month. Bye for now.
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