Canada’s inflation rate came in stronger than expected in September despite lower gasoline prices, with stickier underlying pressures likely to keep the Bank of Canada on an aggressive rate-hiking path. 

The consumer price index was up 6.9 per cent from a year ago, higher than economist predictions for a 6.7 per cent gain, Statistics Canada reported Wednesday in Ottawa. During the month of September, prices rose 0.1 per cent versus expectations for a 0.1 per cent decline.

The data caused traders to shift bets toward a larger rate hike next week, with markets now pricing in a 60 per cent chance of a 75-basis-point increase from the Bank of Canada. That would take the benchmark overnight lending rate to 4 per cent, where it hasn’t been since early 2008.  

“Underlying inflation remains extremely persistent and sticky at above 5 per cent,” Bank of Montreal Chief Economist Doug Porter said in a note to investors. “Combined with the BoC’s recent tough rhetoric, the recent weakness in the Canadian dollar, and the strong likelihood that the Fed hikes by 75 bps at the next FOMC, we are now expecting a like-sized 75 bp hike next week from the bank.”

Bond fell, with benchmark Canada two-year debt yielding 4.125 per cent as of 9:06 a.m. in Toronto, nearly 7 basis points higher than before the release. Five-year and 10-year yields also rose. The loonie strengthened, paring losses from earlier in the morning to trade at $1.377 per U.S. dollar. 

So-called core inflation -- which excludes more volatile prices to generate a better gauge of underlying pressures -- remained elevated. The average of the Bank of Canada’s three core measures was 5.3 per cent, matching a revised number for August.

What Bloomberg Economics Says...

“A smaller-than-expected deceleration in consumer prices raises the odds of a 75-basis-point hike at the Bank of Canada’s Oct. 26 decision, compared to the consensus and our view ahead of the release for a 50-bp move. Yet the larger move isn’t a slam dunk, as core measures of inflation were stable and surging mortgage costs -- one driver of the sturdy reading -- are a function of the BoC’s own hikes.”

-- Andrew Husby, economist

Before Wednesday’s report, traders were fully pricing in a 50-basis-point interest rate increase at the Oct. 26 decision. Governor Tiff Macklem and his officials have already increased borrowing costs by three percentage points since March, bringing the overnight rate to 3.25 per cent.

“The Bank of Canada has clearly not slayed the inflation dragon yet, and is therefore set for another large increase in interest rates,” Karyne Charbonneau, an economist at Canadian Imperial Bank of Commerce, said in a report to investors.

While Canadians got some reprieve at the gas pump, the data show they continued to feel the pinch when filling their fridge. Rising prices for food -- including meat, bakery products and vegetables -- highlight how weakness in the Canadian dollar complicates the outlook for inflation.

Prices for food purchased from stores grew 11.4 per cent, the fastest year-over-year pace since August 1981. Those prices have been increasing at a faster rate than overall inflation for 10 consecutive months.

Mortgage interest costs continued to put pressure on inflation in September as Canadians renewed or initiated loans at higher rates, the statistics agency said.

While lower gas prices slowed goods inflation, cost inflation in services accelerated to 5.6 per cent from 5.5 per cent.

Average hourly wages rose 5.2 per cent on a year-over-year basis last month, meaning that prices are still rising faster than paychecks, the agency said. The gap in September was larger than in August.