December’s Consumer Price Index report for Canada is another bump in the road in the path toward price stability.
The overall index rose by 3.4% on a year-over-year basis in December, up from 3.1% in November, primarily because of the base effect, or comparisons to a year ago. Prices dropped from November to December last year.
While it is a sure bet that the Bank of Canada will hold its policy rate at 5% next week, the central bank should begin slashing interest rates as early as April.
Given that the economy has slowed to a crawl and that inflation at this point is solely driven by shelter, keeping the rates higher for longer will not help.
Shelter inflation occurs because of two factors: high rent growth brought about by the housing shortage and rising mortgage payments.
The Bank of Canada cannot fix the former: The housing shortage is a structural problem that will take many years to address.
High mortgage interest payments, however, are directly caused by monetary policy and can be addressed by easing interest rates.
While core inflation showed little downward progress in December, that reading is likely an exception, and a downward trend is likely to come in the upcoming months.
A year of price growth for services]
On average, the CPI rose by 3.9% last year, a substantial decrease from 6.8% in 2022 but still elevated, according to data released by Statistics Canada on Monday.
Higher oil supplies coupled with lower demand because of a slowing global economy led to falling gasoline prices, which contributed the most to the decline.
Inflation last year stemmed mostly from price growth for services as easing global supply chains moderated price increases for goods.
Read more of RSM Canada’s insights on the economy and the middle market.
Broad-based increases in labour costs were behind the rising cost of services. Now that the labour market is more balanced, price pressures on services will ease in the coming months.
As an exception from goods, food inflation slowed to 7.8% last year, down from 9.8% in 2022, but still way above other categories.
Price increases in categories like food and shelter have contributed to consumers’ perception of inflation being much higher than the actual number, and to expectations of higher inflation to come.
The data
On a month-over-month basis, prices dropped by 0.3%, mainly because of lower prices for travel tours, which fell by 18.2%, and gasoline, down by 4.4%. On a seasonally adjusted monthly basis, CPI rose by 0.3% in December.
Shelter inflation, at 6% year over year, remains the major sore point. In particular, rents increased by 7.7% on an annual basis, while homeowners continued to feel the pain of higher mortgage payments.
Food prices increased by 4.7% on a yearly basis, matching November’s reading.
On a monthly basis, gasoline prices fell by 4.4% in December, the fourth consecutive monthly decline.
The takeaway
December’s CPI increase is likely a blip in the path toward price stability because of the base effect. Both headline inflation and core inflation will likely ease to a rate below 3% soon.
The Bank of Canada will need to lower its policy rate by the spring as inflationary forces except for shelter have largely dissipated.
