Canadian Consumer Prices Show Signs of Rebound in December
Consumer prices in Canada experienced a rebound in December, indicating ongoing inflation concerns for the central bank. Despite a recent slowdown, inflation remains a significant concern, and key indicators will be closely monitored before consideri...
Troy D. Hanson
January 16, 2024
Consumer prices in Canada experienced a rebound in the final month of last year, indicating that the central bank's battle against inflation is far from over, despite a significant slowdown in the yearly rate.
According to the government statistics agency, the consumer-price index dropped by 0.3% in November compared to the previous month, but it increased by 3.4% on a yearly basis. This growth comes after November's 0.1% monthly gain and represents an acceleration from the 3.1% annual inflation rate observed in that same month.
This increase in annual inflation was anticipated, considering that inflation also rose in the United States and the eurozone bloc during the same period. However, this development has not affected expectations that central banks will prepare to lower interest rates this year.
Furthermore, core prices, which exclude volatile food and energy items, also experienced a slight moderation, rising by 3.4% in December compared to the previous year, slightly lower than the 3.5% increase seen in the prior month, as reported by Statistics Canada.
Nevertheless, the Bank of Canada may find less comfort in the fact that two measures of annual core inflation closely monitored by the bank are accelerating. The weighted median and trimmed mean CPI increased on average by 3.65% in December compared to the same period the previous year, surpassing the 3.55% growth observed in November. The bank is closely monitoring these indicators for any signs that inflation is moving towards a sustainable path of 2% before considering rate cuts.
The rebound in headline inflation in December can be attributed mainly to the base-year effect of gasoline prices. Although prices at the pump have been declining on a monthly basis for four consecutive months, they were still up by 1.4% compared to December 2022 when gasoline costs decreased significantly. Excluding gas prices, headline inflation slowed to 3.5% for the month, down from 3.6% in November, but still well above the central bank's target.
Additionally, Canadians continued to face higher rent prices last month, as prices remained elevated in most provinces due to the higher interest rate environment. Air fares also experienced a significant increase from the previous month, while on an annual basis, they fell by a smaller margin compared to the end of 2022. Furthermore, consumers had to deal with increased prices for passenger vehicles, partly due to the availability of new 2024 models.
Overall, the latest data underscores the ongoing challenges faced by the Bank of Canada to contain inflationary pressures and achieve its target rate. Despite a recent slowdown, inflation in Canada remains a significant concern, and the central bank will closely monitor key indicators before considering any changes to interest rates.
Economic Outlook: Inflation Levels and Impact on Canada's Growth
Economists are predicting a continued decrease in inflation as Canada's economic growth remains stagnant in the coming quarters. The Bank of Canada anticipates a transitional year in 2024, as the effects of previous interest rate increases, which elevated the policy rate to a 22-year high of 5%, continue to restrain spending and dampen economic growth.
The central bank intends to update its economic projections during its upcoming rate decision, where it will be revisiting its forecasts. Previously, the bank projected that inflation would hover around 3.5% until mid-year, only returning to its target range by 2025.
A recent survey conducted by the Bank of Canada revealed that households have adjusted their behavior in response to high inflation. However, expectations regarding inflation for services such as rent have remained persistently elevated, potentially hindering a swift return to pre-pandemic inflation levels. The bank is also monitoring other aspects of the economy that could impact its efforts to curb inflation. These include a rebound in existing-home sales last month and an increase in average wage growth observed in December.
Statistics Canada reported that the Consumer Price Index (CPI) rose by an annual average of 3.9% for the year. Although cooler than the record-breaking increase of 6.8% observed in 2022, this still surpassed the 3.4% average advance seen in 2021. In fact, excluding inflation in 2022, this was the largest annual increase since 1991. Despite a decreasing trend since January of last year, year-over-year price growth for all items remained between 3% and 4% throughout the last six months of 2023.
All major components tracked by the data agency experienced price growth on an annual basis, although the transportation sector recorded the most significant slowdown due to lower gasoline prices. Deceleration was also evident in the food and shelter sectors.