Headline Canadian inflation slowed last month, but underlying price indicators rose by more than forecast, raising monetary policy expectations for the months ahead. Data released by Statistics Canada this morning showed the Consumer Price Index rising 6.8 percent on a year-over-year basis in October, with the month-over-month change hitting 0.1 percent – narrowly exceeding consensus economic forecasts for a flat print.

Gasoline prices tumbled -3.6 percent month-over-month while food prices underwent their typical November acceleration, climbing 1.2 percent.

Shelter costs kept climbing, up 0.6 percent month-over-month as higher interest rates took their toll. Mortgage interest costs increased on a year-over-year basis by 14.5 percent, rising at the fastest pace since 1983. The homeowners’ replacement cost index, a proxy for home prices, continued to lose momentum, up just 5.8 percent year-over-year.

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 5.15 percent over the same period last year. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

Although the Bank of Canada has clearly hinted at an imminent pause in its tightening cycle, core price pressures remain well above the institution’s target range, making another quarter-point interest rate hike reasonably likely in the first quarter of 2023. But this is unlikely to narrow the gap with the Federal Reserve – the US central bank is expected to continue raising rates for longer, and cut them later – meaning that the Canadian dollar won’t receive much support from interest differentials in the near term.