Canada: Lower Headline Inflation in November but Underlying Price Pressures Remain Sticky

November brought more good news on the inflation front for Canada. Goods price inflation again played an important contributing role, as Black Friday and related specials typically offered in the month of November weighed on overall price growth. On a monthly basis, lower prices for furniture (-2.1% m/m), women’s clothing (-0.8%) and children’s clothing (-4.9%) all lent a hand. Consequently, prices of clothing and footwear posted a notable monthly drop (-0.8%), as did household operation and furnishing (-0.9%), which was pulled lower still by a steep decline in the cost of cellular services (-6.1%). And we may see more weakness in some of these price categories going forward as the federal government’s planned GST holiday External link. comes into effect. As a result, on a year-over-year basis, the cost of goods excluding energy fell 0.6% y/y from a year earlier. Meanwhile, overall goods prices were flat in November (graph 1) thanks to still lofty food price inflation (2.8%) and less drag from gasoline prices (-0.5%), which were flat month-over-month. 

Services inflation remained sticky, although at 3.5% (y/y) it is the lowest annual advance since January 2022. Services inflation is being kept aloft by sustained growth in the cost of housing. Shelter inflation (4.6%) continues to make by far the largest contribution to headline inflation (graph 2). Growth in the cost of rented accommodation reaccelerated in November (7.7%), although our research External link. suggests it should slow steadily going forward. Meanwhile, the weightier owned accommodation inflation slowed to 4.6% in the month, the slowest year-over-year gain since May 2021. 

Looking to underlying inflation, the Bank of Canada’s preferred measures of core year-over-year price growth—CPI median and trimmed mean—were unchanged in November (averaging 2.7% y/y), managing to stay under 3% for the seventh consecutive month. However, the annualized 3-month moving average of these seasonally adjusted series moved considerably higher in the month, topping 3% for the first time since January of this year (graph 3). That said, the increase in those measures partially reflects the inclusion of mortgage-interest costs in the calculation in November, a category which had previously been excluded. Given that mortgage-interest cost inflation has decelerated and will likely continue to do so now that the Bank of Canada has conducted a number of rate cuts, central bankers might want to look through that strength in their preferred measures. But while that may suggest there’s no reason for the Bank of Canada to panic, the three-month annualized rate of core services excluding shelter also remained elevated in November, at 3.3%.

While the deceleration in headline CPI inflation was a positive in November, the underlying strength of core inflation needs to be monitored closely. As a result, the Bank of Canada’s guidance for more gradual rate cuts in 2025 remains intact. It also reinforces our call the next rate cut in January is likely to be a more modest 25 basis points, and that subsequent rate reductions should be of a similar magnitude.