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December CPI rises to 3.4%

Canada’s rate of inflation closed out 2023 on a slightly higher note, coming in at 3.4%. That’s up from the 3.1% recorded in the previous two months, and indicates a point of stagnancy in the Bank of Canada’s battle to tame the measure back down to 2%.

But the fact that the headline number ticked higher isn’t cause for concern – yet. Markets had largely expected December’s stronger reading, due to the base-year effect in gas prices. While the price of gas fell on a monthly basis for the fourth month in a row, reports Statistics Canada, December’s annual growth of 1.4% outstripped that of November’s,  which fell -7.7% compared to the same time frame in 2022.

“The good news is that the back-up in headline inflation should last only a month, as base effects are easier next month and gas prices are aiming for another small dip in January,” writes Douglas Porter, Chief Economist and Managing Director of Economics at BMO.

Excluding gasoline, the headline CPI slowed annually, from 3.6% in November to 3.5% in December. On a monthly basis, growth is largely flat, down 0.3%, following November’s 0.1% gain.

Mortgage interest and rents remain biggest inflation factors

According to StatCan, the other major contributors to inflation were higher airfares, fuel oil, passenger vehicles, and rent. The latter has been particularly steep, rising 7.7% year over year, following a 7.4% increase last month. StatCan also points to today’s steep interest rate environment, which “can create barriers to homeownership [and] put upward pressure on the index.” In fact, mortgage interest costs remain the top contributor to inflation annually, up 28.6% year over year.

Food prices, meanwhile, continued to rise by 4.7%, on par with November.

Canada’s CPI report follows a similarly stronger-than-expected reading released in the US last week, also ending 2023 with a 3.4% increase. 

Core inflation remains a stick in BoC’s side

The main concern moving forward, says Porter, is that the Core inflation measure, which strips out the most volatile items such as food and energy, has remained sticky with the trim and median numbers – two metrics closely watched by the central bank – coming in above headline at 3.7% and 3.6%, respectively.

“While the higher headline was little surprise, and precisely mimicked the U.S. inflation experience in December, the slightly more unsettling news is the persistence of core in the mid-3s,” he writes.

“That sticky theme was echoed in yesterday's BOS, and suggests that the last mile (or kilometre) of the inflation fight may prove to be the most challenging—bringing underlying inflation sustainably back below 3%. Given that wage trends are also stuck in the 4%-to-5% range, and now even housing may be showing a pulse, suggests that the Bank of Canada will doggedly maintain a cautious stance at next week's rate decision and MPR. We are comfortable with our call of a first rate cut at the June meeting, even as the market leans in earlier.”

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Today’s reading won’t derail rate cut expectations

The BoC indicated in its final 2023 announcement on December 6 that so long as inflation metrics continue to perform as expected, it would refrain from increasing its trend-setting overnight lending rate – which acts as the base for variable mortgage rate pricing – any further. This has stoked cautious optimism among markets and borrowers alike that lower mortgage rates could be on the horizon as early as the spring. However, fears remain that economic surprises – such as unexpectedly high inflation – could derail the Bank’s holding-pattern plans and force them to return to their hiking cycle. 

From a big picture perspective, though, both the US and Canadian economies have seen significant progress in their inflation battles throughout the year, with continued improvement expected into 2024.

“For all of 2023, headline inflation averaged 3.9%, a snick below the 4.1% average rise in U.S. prices,” Porter writes. “While down from the towering 6.8% surge in 2022, that was still the second fastest rise in consumer prices for a full year since 1991. We look for inflation to average a somewhat milder 2.8% in both economies this year.”

The next Bank of Canada announcement is scheduled for January 24, 2024.

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