Canada: Final Inflation Print of 2023 Will Raise Some Eyebrows

It’s always a good day when the CPI inflation data is in line with our call. But that’s pretty much where the good news ends. The seasonally-adjusted monthly move isn’t consistent with the Bank of Canada’s 2% inflation target, and details under the hood should give some pause for the overly dovish crowd.

Shelter continued to make an outsized contribution to headline inflation relative to a year ago (graph 1). At 6.0% y/y, it accelerated over November largely as a result of stronger rents. Food also played an important role in the December advance, and may raise concerns for households given its strength in the month. Transportation also deserves a nod, as gasoline prices contributed to the year-over-year advance despite falling on the month. The price of air transportation also rose at the fastest monthly pace since reopening from lockdowns pushed it to a record in April 2021. The purchase price of passenger vehicles  moved higher as well. But there were some offsets, notably in prices linked more closely to discretionary spending, such as recreation and home operations (e.g., cellular services). 

Digging deeper into the data, indicators of underlying inflation generally moved in the wrong direction in December. The Bank of Canada’s preferred measures of core inflation—CPI median and trimmed mean—were slightly higher than in November on a year-over-year basis. But on a 3-month annualized basis, these measures averaged an increase of 0.7 percentage points to reach 3.5% and 3.8%, respectively (graph 2). In contrast, the traditional measure of total CPI inflation excluding food and energy measured the same way held steady at 3.8%.

The December inflation data make clear that we’re not out of the woods yet. The higher move in most metrics, particularly CPI median and trim, likely wasn’t what the Bank was hoping for. But at 3.2% y/y, total CPI inflation did come in slightly below the Bank’s 3.3% y/y projection for Q4 2023 in the October 2023 Monetary Policy Report. And according to our tracking, real GDP growth in Q4 is tracking roughly half the pace in the Bank’s most recent forecast. Yesterday’s consumer and business surveys from the Bank of Canada also pointed to lowered expectations for future inflation and economic activity. All in, there is enough evidence of progress to keep our call for rate cuts to begin by mid-2024 unchanged. We’ll reevaluate this call following the upcoming rate announcement next week.