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Underlying Canadian Inflation Tops Forecasts

Canadian headline inflation accelerated as expected in December, but the underlying price indicators followed most closely by the Bank of Canada firmed – helping slash odds on an imminent pivot toward easier monetary policy. Data released by Statistics Canada this morning showed the Consumer Price Index rising 3.4 percent on a year-over-year basis in December, up from the 3.1 percent increase recorded in November, and precisely in alignment with consensus expectations. On a month-over-month basis, prices fell -0.3 percent – matching market forecasts.

Gasoline prices fell -4.4 percent month-over-month, and food prices gained 0.3 percent. Shelter costs provided the biggest lift, rising 6 percent year over year on higher rent and mortgage costs. With shelter costs excluded, prices rose just 2.4 percent year over year.

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 3.65 percent over the same period last year, up from a revised 3.55 percent average in the prior month. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

The swap-implied trajectory for rate cuts in 2024 is pulling back, generating gains in the Canadian dollar as traders anticipate a later and less aggressive easing cycle. Although the “last mile” in bringing inflation down could prove bumpy, we don’t expect this shift in market positioning to last: survey data published yesterday showed the Bank of Canada’s tightening efforts gaining traction, with companies reverting toward pre-pandemic pricing behaviour as demand for products and services weakens. Consumer inflation expectations are falling, and many households are reporting facing significant financial strain – suggesting that the underlying economic outlook remains soft.

Consumer price indices, annual % change

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