Canadian headline inflation decelerated by more than expected last month, lowering the hurdle to an outsized rate cut at next week’s Bank of Canada meeting.

Data released by Statistics Canada this morning showed the Consumer Price Index decelerating to 1.6 percent on a year-over-year basis in September, down from the 2-percent increase recorded in August and well below consensus expectations that had been set closer to 1.8 percent. On a month-over-month basis, prices fell -0.4 percent. Excluding shelter costs, prices rose just 0.4 percent relative to a year prior.

Underlying pressures remained sticky: core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 2.35 percent over the same period last year, holding steady with the prior month. The older “CPI-X” measure, which excludes eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products) as well as the effect of changes in indirect taxes on the remaining components, climbed 1.6 percent over last year, up from 1.5 percent previously. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

We’re still not convinced the Canadian economy needs an emergency-scale response, but there is little question today’s data will lower the downside risks associated with moving more aggressively. Swap-implied odds on a half-percentage-point rate cut at next week’s Bank of Canada meeting are firming, and driving the Canadian dollar lower. Pricing derived from overnight index swaps suggests a 78-percent likelihood of an outsized move, up from 54 percent ahead of the release.