Despite expectations that inflation would dip below 3% in November, headline inflation instead stalled, remaining unchanged from October.
Headline inflation came in at 3.1% last month, Statistics Canada reported today. At the same time, the Bank of Canada’s preferred measures of core inflation, which strip out food and energy prices, were also unchanged from October. CPI-trim and CPI-median both held steady at 3.5% and 3.4%, respectively.
“Today’s moderately disappointing result drives home the point that we still have an inflation fight on our hands,” wrote BMO’s chief economist Douglas Porter.
However, he added the November reading is still largely in line with the Bank’s forecasts, which is for an inflation rate of 3.3% in Q4. Porter also noted the sharp slowdown in annualized inflation from a rate of +6.8% a year ago.
“Such swift and heavy declines in headline inflation are rare, and have typically only been witnessed in the wake of a recession; so the fast fall in the past year is very much welcome news,” he said.
Mortgage interest and rent remain two largest contributors to inflation
The November figures revealed that food prices rose at a slower pace, posting +5% growth vs. 5.6% in October. And energy prices were down 5.7% compared to last year.
But shelter costs continued to exert upward pressure, even though the pace eased from October (+5.9% vs. +6.1% in October).
Rent is up 7.4% year-over-year, while mortgage interest costs—driven higher by the Bank of Canada’s rate hikes—are still up 29.8% from last year.
Prices for travel tours was also an “unexpected culprit,” posting a 26.1% year-over-year increase due to major events held in the U.S., economists from Desjardins noted.
Markets may have been “a bit aggressive” in their rate-cut forecasts
The rapid deceleration in inflation in previous months and a contraction in GDP in the third quarter led to markets moving up their calls for the first Bank of Canada rate cuts to the second quarter of 2024.
“The latest result reinforces the message that markets had been a bit aggressive in their pricing of early and often rate cuts,” Porter noted.
“If anything, the release today serves as a reminder that inflation readings can still be ‘sticky,’ and why we continue to expect a cautious approach as the BoC starts to think about when to begin cutting interest rates,” added RBC’s Claire Fan. “Our expectation is for the first rate cut to come around mid-year 2024, contingent on further (but widely expected) softening in CPI readings in the months ahead.”
Looking ahead, CIBC’s Andrew Grantham notes that base effects from gasoline prices are expected to be “less favourable” in December, which could lead to a brief acceleration in inflation before “easing more sustainably” over the spring and summer.
“However, with drivers of inflation becoming less broad-based, the Bank of Canada’s preferred core measures should continue to decelerate, which combined with a sluggish trend in economic activity will likely bring a first interest rate cut in June next year,” he added.