Canada’s annual inflation rate for December met expectations by rising to 3.4%, up from 3.1% in November, according to data released on Tuesday by Statistics Canada. This data, along with the acceleration of two of the Bank of Canada’s (BoC’s) core measures of underlying inflation, has quashed hopes of an early shift to rate-cut mode by the central bank in the beginning of the year.
The Consumer Price Index (CPI) for December matched economists’ estimates, with a 0.3% month-on-month decline from November. Royce Mendes, Head of Macro Strategy for Desjardins Group, noted that the three-month annualized rate of acceleration in the CPI-trim and CPI-median measures rose to 3.6%, up from an upwardly revised 2.9% in the prior month. Mendes expressed disappointment, stating, “The stickiness in these core measures of inflation comes as a disappointment to Canadians hoping to see enough progress today to open the door to rate cuts.”
Canada’s headline inflation has been above the BoC’s 1-3% target range since March 2021. The central bank had raised its key policy rate to 5% between March 2022 and July 2023 to tackle inflation. The BoC’s next interest rate announcement is scheduled for January 24, and it is widely expected to maintain its key policy rate at the current level.
Following the release of the data, money markets adjusted expectations, showing a reduced one-third chance of the BoC starting to cut interest rates in March, down from nearly 50% before the figures were released. However, markets still anticipate a high probability of a 25-basis-point reduction in April.
Higher gasoline prices compared to the previous year primarily drove the annual inflation rate, as per Statscan. Airfares, fuel oil, passenger vehicles, and rent also saw acceleration. Food purchases from stores rose by 4.7% year-on-year. Excluding energy and food prices, the annual inflation rate slowed to 3.4% from 3.5% in November.
The Canadian dollar initially experienced a decline but partially recovered, still trading 0.3% lower against the U.S. dollar. Andrew Kelvin, Chief Canada Strategist at TD Securities, emphasized that the acceleration in core inflation indicates that the BoC needs to see further progress before considering lowering interest rates. Governor Tiff Macklem had previously stated that inflation should be closer to the target by the end of this year.
Canada’s economy faced stagnation in October, with a BoC survey published on Monday revealing a decline in order books for Canadian companies in the fourth quarter due to interest rates impacting consumer spending. The survey indicated expectations of easing inflation.
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