Core inflation accelerates
by Randy Thanthong-Knight
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 campaign to restore price stability.
The consumer price index 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.
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 Bank of Canada 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 annualized pace of 3.63%, from 2.94% a month earlier, according to Bloomberg calculations. It’s an important metric because Bank of Canada Governor Tiff Macklem has said policymakers are tracking it closely to understand more recent inflation trends.
Overall, Tuesday’s 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 Bank of Canada’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 unexpected acceleration in core inflation may also push back some bets for the first cut beginning in April.
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 consumer price index 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.
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.
Copyright Bloomberg News
