Canada’s inflation in November failed to make progress, staying steady at 3.1%. But core inflation apart from housing and food continued to trend lower and came in around 3.5%, markedly lower than earlier this year.
Food and housing remain primary drivers of inflation. On a year-over-year basis, mortgage interest costs spiked by a whopping 29.7%—the largest contributor to inflation. Rents increased by 7.4%. Excluding shelter, inflation has fallen to 1.9%, the pre-pandemic level.
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That monetary policy is now a driver of inflation should give the Bank of Canada some room to initiate rate cuts next year to prevent a harder-than-needed landing in the economy.
Energy prices fell by 5.7%. Part of the decrease was because of the temporary suspension of the federal carbon levy on fuel oil. Gasoline prices fell by 3.5%, which is less than in October and contributed to inflation.
The data
Good prices went up by 1.4% on an annual basis, continuing the deceleration, while services price growth was steady at 4.6%. The price pressures from the pandemic times are mostly gone in goods and persist only in services.
Prices for travel tours went up by 26.1% because of events held in destination cities in the United States. Even as households tighten their budgets and cut spending, traveling is one area that has remained resilient.
Restaurant prices went up by 5.5%, still above headline inflation but the lowest since early last year. As households move to cut back on spending even on services, demand on dining out has fallen, leaving less room for restaurants to raise prices despite higher labour costs.
Groceries prices rose by 4.7% on an annual basis, the slowest pace in two years.
Prices of nonalcoholic beverages, which fell by 0.6%, and fresh vegetables, up by 2.5% contributed to the deceleration of groceries prices, while meat, up by 5.0%, and sugar and confectionery, higher by 8.3%, increased at a faster pace.
Even with the smaller increases, the baseline price levels of groceries have elevated so much over the past couple of years that even smaller increases will still cause lower-income households to struggle.
The takeaway
Despite a somewhat disappointing inflation report, there was enough deceleration that the Bank of Canada should feel comfortable to begin cutting rates in the second quarter.
We expect four 25 basis-point rate cuts next year, with further cuts in 2025 to reach 3%. In the new era of more fraught supply chains, higher labour costs and more uncertainty, 3% is likely the neutral policy rate.
