Cautious outlook: Macklem at a news conference in Ottawa, Ontario. A majority of economists expect the BoC to keep borrowing costs unchanged, and anticipate a series of rate cuts starting in the second quarter. — Reuters
TORONTO: The rate of inflation in Canada ticked up slightly due to base effects while underlying price pressures also rose at a faster pace, highlighting a challenge for the Bank of Canada’s (BoC) campaign to restore price stability.
The consumer price index (CPI) rose 3.4% in December from a year ago, following a 3.1% increase a month earlier, Statistics Canada reported Tuesday in Ottawa. That matched the median estimate in a Bloomberg survey of economists.
On a monthly basis, the index fell 0.3%, also matching expectations. That’s the biggest drop since December 2022, and is largely due to declines in prices for travel tours and gasoline.
After the release, the yield on two-year Canadian government bonds rose about four basis points to 3.857%.
Traders in overnight swaps pushed back bets on when the BoC will start cutting rates to July, from as early as April before the release.
Despite gasoline prices decreasing on a monthly basis for four straight months, the acceleration of the headline rate rose as a result of a base-year effect, where gasoline prices fell more on a monthly basis last December.
The year-over-year comparison can often skew the reading, but for December, core inflation also accelerated.
Two key yearly inflation measures that are tracked closely by the BoC and filter out components with more volatile price fluctuations – the so-called trim and median core rates – increased, averaging 3.65%, from an upwardly revised 3.55% a month earlier.
That’s faster than the 3.35% pace expected by economists. The trim rate rose due to the movements of rent and passenger vehicle prices.
Another key measure, a three-month moving average of underlying price pressures, rose to an annualised pace of 3.63%, from 2.94% a month earlier, according to Bloomberg calculations.
It’s an important metric because BoC governor Tiff Macklem has said policymakers are tracking it closely to understand more recent inflation trends.
Overall, the report points to the difficulty of the last mile of getting inflation back to the 2% target. Macklem warned in December of a few “bumps” along the way.
The governor and his officials held the benchmark overnight rate at 5% for the third straight meeting last month, saying they’re still concerned about the outlook for price pressures.
This setback in their inflation battle will likely keep them on hold.
This is the last of two inflation reports before the BoC’s next rate decision next week.
The majority of economists in a Bloomberg survey expect the bank to keep borrowing costs unchanged, and anticipate a series of rate cuts starting in the second quarter.
“The pick-up in underlying inflation pressures raises the risk that the BoC will need to keep interest rates higher for longer than markets are now pricing in, with the economy suffering further as a result,” said Stephen Brown, an economist with Capital Economics, in a note to investors.
“As the bank pays more attention to those core measures than the CPI excluding food and energy, those larger increases mean the bank is likely to remain a hawkish tone at its meeting next week and reduce the chance of it cutting interest rates any time soon.”
December’s report once again shows shelter inflation as largest upside contributor to the year-over-year price gains, as past rate increases, a supply shortage and high immigration levels pushed up prices.
Mortgage interest costs jumped 28.6% and rent rose 7.7%. Excluding shelter costs, the CPI rose 2.4% from a year ago, versus 1.9% in November.
On Monday, the central bank’s consumer survey showed expectations for price growth for some key consumer goods – notably food and gas – are falling, likely contributing to the decline in people’s perceptions of overall inflation.
But inflation expectations for services – like entertainment, dining and rent – remain elevated, which may be holding back progress on restoring overall perceptions for price gains.
“We don’t expect this shift in market positioning to last: survey data published yesterday showed the BoC’s tightening efforts gaining traction,” said Karl Schamotta, chief market strategist at Corpay, in a report to investors.
“Consumer inflation expectations are falling, and many households are reporting facing significant financial strain – suggesting that the underlying economic outlook remains soft.”
In December, services inflation slowed 4.3% from a year ago, versus 4.6% a month earlier. Goods inflation rose to 2.4%, compared with 1.4% increase in November.
The purchase of passenger vehicles index rose 2.3% on a year-over-year basis, following a 1.5% increase in November.
The increase was led by higher prices for new passenger vehicles.
Regionally, prices grew at a faster pace from a year ago compared with November in nine of 10 Canadian provinces, except in Manitoba.
Prices for fuel oil contributed the acceleration, and Atlantic Canada, where it’s more commonly used for heating homes, saw bigger price gains compared with others.
In 2023, the consumer price index rose 3.9% on an annual average basis, following a 40-year high increase of 6.8% in 2022 and 3.4% in 2021. — Bloomberg
