September shows 6.9% inflation hike. How will it affect Bank of Canada’s next rate decision?

Last month, Canada’s inflation rate turned out to be higher than expected in spite of lower gasoline prices. Such results will probably keep the central bank on its aggressive rate-increase track.

According to Statistics Canada, the consumer price index rose by 6.9% annually, while economists predicted a 6.7% gain. Monthly comparison shows a 0.1% increase, and the average forecast for September was a 0.1% drop.

The new numbers made traders raise their forecasts: now they believe the probability of a 0.75% rate increase next week is 60%. If it happens, the benchmark overnight rate will reach 4%, where it hasn’t been since the beginning of 2008.

“The inflation is still extremely persistent, exceeding 5%,” – Bank of Montreal Chief Economist Doug Porter noted. “Combined with the central bank’s recent aggressive tone, the latest weakness in the Canadian dollar, and the strong possibility of a 0.75% rate increase in the U.S. next time, we are now predicting a 0.75% rate hike from the Bank of Canada next week.”

Core inflation, which excludes more volatile prices, also remained elevated. The average of the BoC’s three core measures was 5.3%, which coincides with the reviewed results of August.

Before this report, traders were expecting a 0.5% rate increase on October 26. The central bank has already raised borrowing costs by 3% from March to 3.25%.

“The Bank of Canada has certainly not defeated the inflation monster yet, that’s why it plans another large rate hike,” – Karyne Charbonneau, an economist at CIBC, said.

Although Canadians got some relief at the gas pump, the report shows they kept facing difficulties with the grocery shopping. Growing prices for food, including meat, bakery products and vegetables, point to how weakness in the Canadian dollar complicates the inflation issue.

Food prices in stores were up by 11.4%, marking the largest gain since August 1981. They have been growing faster than overall inflation for 10 months in a row already.

According to Statistics Canada, mortgage interest costs kept pressuring inflation last month, as Canadians renewed or initiated loans at higher rates.