Canada: Happy Xmas (The War on Inflation Isn’t Over Yet)

Few had anticipated headline inflation to be unchanged in November. Prices for travel tours was an unexpected culprit, rising 26.1% over November of last year due to major events held in the US. That said, shelter services was once again the largest contributor to price growth, with owned accommodation accelerating to 6.8% y/y in the month while rented accommodation inflation showed just a slight slowdown to 7.3%. As such, it's not surprising that total CPI excluding shelter was unchanged at 1.9% y/y in November.

It’s not all bad news in the fight against inflation in Canada. Prices of cellular services dropped 22.6% from a year ago, continuing the sustained drag coming from the category. Energy prices also fell more on a year-over-year basis than in the prior month (graph 1). This was the result of lower gasoline prices and thanks in small part to the temporary suspension of the federal carbon tax on home heating fuel. At the same time, the pace of advance in grocery prices continued to slow, with the prices for food purchased from stores advancing by 4.7% y/y in November, down from 5.4% in October. And the slowdown in grocery costs gains was also broad based. Consequently, goods inflation showed further improvement in November while services prices were largely unchanged in the month.

Digging deeper into the data, indicators of underlying inflation were decidedly more mixed. The Bank of Canada’s preferred measures of core inflation—CPI median and trimmed mean—were unchanged from October. But on a 3-month annualized basis, these measures each shed 0.4 percentage points to reach 2.3% and 2.6%, respectively (graph 2). In contrast, the traditional measure of total CPI inflation excluding food and energy measured the same way moved higher, to 4.1% from 3.6%.

The November inflation data probably wasn’t what the Bank of Canada was hoping for. But total CPI inflation is tracking below the Bank’s 3.3% y/y projection for Q4 in the October 2023 Monetary Policy Report. And depending on how you slice it, the Bank’s preferred measures of core inflation were either flat or improved in the month. Total CPI inflation excluding shelter also remained steady below 2% for the second consecutive month. All in, there is enough evidence of progress in the November inflation report to keep our call for rate cuts to begin by mid-2024 unchanged.