Inflation crept back up in December: “We’re not out of the woods yet”

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For the third time since 2022, Canada’s headline inflation rate reversed course and trended back upward in December.

Headline inflation rose 3.4% last month, Statistics Canada reported today. That’s up from the 3.1% growth in November and was expected by economists.

StatCan noted that the increase was largely due to base effects, which refers to the impact of price movements from 12 months earlier on the current month’s CPI. In this case, gas prices in December 2022 fell more than they did in December 2023. Excluding gasoline, headline CPI would have slowed to 3.5% in December from 3.6% in November, StatCan added.

At the same time, the Bank of Canada’s preferred measures of core inflation, which strip out food and energy prices, remain elevated and outside of the Bank of Canada’s comfort level. CPI-median held steady at 3.6% (although November’s reading was upwardly revised from 3.4%), while CPI-trim rose to 3.7% from 3.5%.

“The December inflation data make clear that we’re not out of the woods yet,” wrote Randall Bartlett, senior director of Canadian Economics for Desjardins. “The higher move in most metrics, particularly CPI median and trim, likely wasn’t what the Bank was hoping for.”

Bank of Canada to remain “cautious” at next week’s rate decision

Given that both headline and core measures of inflation remain well above the Bank of Canada’s desired neutral rate of 2%, economists say the Bank will continue to hold a “cautious stance” in the months ahead.

The “stickiness” of recent inflation readings “suggests that the last mile (or kilometre) of the inflation fight may prove to be the most challenging—bringing underlying inflation sustainably back below 3%,” wrote BMO chief economist Douglas Porter.

TD’s Leslie Preston added that it took roughly a year to get headline inflation from 8% to around 3%, but that progress has stalled over the past six months. “December’s inflation report underscores that the last mile of getting inflation all the way back to 2% is the hardest,” Preston wrote.

“Given that wage trends are also stuck in the 4%-to-5% range, and now even housing may be showing a pulse, suggests that the Bank of Canada will doggedly maintain a cautious stance at next week’s rate decision and MPR,” Porter added.

Mortgage interest and rent remain two largest contributors to inflation

Shelter costs continued to be a leading contributor to headline inflation in December at a pace of +6% year-over-year (up from 5.9% in November).

Specifically, mortgage interest cost, which has been pushed higher by the Bank of Canada’s own rate hikes, remains 29.8% above year-ago levels. Rent prices are also up by 7.4%, unchanged from November.

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