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Canada’s inflation rate perked up in December, but it was an acceleration in various core measures of consumer price growth that showed inflation is proving sticky and tough to tame.
The Consumer Price Index (CPI) rose at an annual pace of 3.4 per cent last month, up from 3.1 per cent in November, Statistics Canada said Tuesday in a report. This result was in line with expectations on Bay Street, and it was heavily influenced by what economists refer to as base effects. Because gasoline prices tumbled a year ago, that created an unflattering base for year-over-year comparisons – hence the pick-up in the annual inflation rate.
Instead, it was several measures of core inflation – which strip out volatile movements in the CPI – that raised eyebrows among financial analysts. The Bank of Canada’s preferred measures rose at an average annual rate of 3.65 per cent, from an upwardly revised 3.55 per cent in November. Analysts were expecting a reading of 3.35 per cent.
Canada’s inflation rate ticked up to 3.4% in December. Here’s what happens next
In particular, housing prices continue to be a source of financial strain, rising 6 per cent in December from a year earlier. Rents are a major source of inflationary pressure as plenty of people – including a surge of temporary residents – vie for units in short supply.
The Bank of Canada has repeatedly stressed that bringing inflation back to its 2-per-cent target could be a bumpy journey, and it doesn’t expect to hit that mark until 2025.
After Tuesday’s report, traders trimmed their bets for when the BoC will start to lower its benchmark interest rate, but are still placing heavy odds on April. The Bank of Canada is unlikely to change its key rate from 5 per cent at its next policy decision on Jan. 24.
And while bank economists were somewhat alarmed by the pick-up in core inflation, they generally left their forecasts unchanged and expect rate cuts to start in April or June.
“If you are looking for data to signal a rate cut is imminent, this isn’t it,” Leslie Preston, senior economist at Toronto-Dominion Bank, said in a client note. “December’s inflation report underscores that the last mile of getting inflation all the way back to 2% is the hardest.”
Ms. Preston added: “Despite December’s report, we expect inflation, and the economy, will have cooled sufficiently by the spring for the Bank of Canada to make its first interest rate cut in April.”
Tuesday’s inflation report showed some extreme price swings. Canadians paid 31 per cent more for air transportation in December than November on account of strong seasonal demand. On the other hand, prices for travel tours tumbled by around 18 per cent on a monthly basis.
Meanwhile, prices for home entertainment equipment fell 7.2 per cent in a single month.
“While there is clearly seasonality here, the outsized declines hint strongly at softening discretionary spending,” Bank of Montreal chief economist Doug Porter wrote to clients.
In other categories, consumers are facing plenty of financial strain. Rents jumped 7.7 per cent in December from a year earlier, up from a 7.4-per-cent increase in November. “Among other factors, a higher interest rate environment, which can create barriers to homeownership, put upward pressure on the index,” Statscan said in the release.
Economists have also noted that Canada’s population surge is creating lots of additional demand for rental units amid already low vacancies. “Canada’s housing supply has not kept up with the growth in our population, and higher rates of immigration are widening the gap,” Bank of Canada Governor Tiff Macklem said in a speech last month.
The year-over-year change for grocery prices held steady at 4.7 per cent, while at restaurants, prices have risen by 5.6 per cent over the past year.
The short-term trend for another measure of core inflation – the CPI, excluding food and energy costs – is similarly troubling. The three-month annualized change for that indicator is 3.8 per cent, or much higher than central bankers are comfortable with.
In its latest forecast, which was published in October, the Bank of Canada said inflation could linger at roughly 3.5 per cent until the middle of the year, before easing to around 2.5 per cent in the second half of 2024. Last month, Mr. Macklem said that inflation could get close to 2 per cent by late this year, but also stressed that disinflation won’t follow a linear path.
“Over the coming months, you should expect to see some push and pull on inflation as the cooling economy reduces price pressures while other forces continue to exert upward pressure,” he said. “That’s why further declines in inflation will likely be gradual. When it’s clear that inflation is on a sustained downward track, we can begin discussing lowering our policy interest rate.”
Still, that hasn’t stopped analysts and investors from speculating about the start of rate cuts, and the consensus is that this process will start in the spring or early summer.
The Bank of Canada has raised its key interest rate aggressively over the past two years – to 5 per cent from emergency lows of 0.25 per cent – to tackle the biggest inflation surge in four decades. The impact of these rate hikes is readily apparent in the economy, which has ground to a halt as consumers pull back on discretionary spending. At 5.8 per cent, the unemployment has risen nearly a full percentage point from a record low.
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