As expected, headline CPI inflation moved in the wrong direction in December, rising three ticks to 3.4% year-on-year (y/y).
Energy prices, and more specifically gasoline prices, were a key culprit boosting headline CPI higher. Gasoline prices fell on a monthly basis, but are now 1.4% higher than a year ago, a big swing from being down 7.7% y/y in November. This is the result of a base-year effect, as prices fell 13% in December 2022.
Food inflation is proving stubborn, with prices up 5% y/y in December, matching November’s pace, with prices rising 0.3% m/m.
Core goods prices were also a bit stubborn, up 2.2% y/y, with higher prices for new vehicles (+2.3% y/y) likely playing a role.
Services inflation thankfully cooled a bit in December, up 4.3% y/y versus 4.6% in November. This was despite continued strength in shelter inflation (+6% y/y), and particularly rent inflation, which was up 7.7% y/y from 7.4% in November.
The Bank of Canada’s preferred “core” inflation measures also heated up in December. CPI trim was 3.7% y/y up from 3.5% in November, while CPI median held steady at 3.6% y/y.
Key Implications
If you are looking for data to signal a rate cut is imminent, this isn’t it. December’s inflation report underscores that the last mile of getting inflation all the way back to 2% is the hardest. It took about a year for inflation to drop from its peak of 8% to around 3%, but over the past six months further headway has been halting. This leaves the Bank of Canada cautious as it considers when it will be appropriate to cut interest rates.
Despite December’s report, we expect inflation, and the economy, will have cooled sufficiently by the spring for the Bank of Canada (BoC) to make its first interest rate cut in April (see report). That said, inflation is unlikely to be quite at 2%. As Governor Macklem pointed out in December, the BoC doesn’t need to see 2% to begin normalizing monetary policy, but rather be confident it is getting there.
