Canada’s annual inflation rate accelerates to 3.4% in December, complicating path for BoC

Canada’s annual inflation rate rose to 3.4% in December, marking another bump along the way back to price stability.

Statistics Canada released its consumer price index report Tuesday, which shows Canadians continue to face rapidly rising shelter and grocery costs.

The headline inflation rate ticked up from 3.1% in November, largely because of a sharper decline in gasoline prices a year ago compared with last month.

Economists were widely expecting this rise due to a base-year effect, which refers to how price movement from a year ago affects the calculation of overall inflation.

With some core measures of inflation also up, Tuesday’s report reinforces the expectation that the Bank of Canada won’t be in a rush to cut interest rates. 

“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,” wrote Leslie Preston, a managing director and senior economist at TD.

The U.S. saw a similar increase in inflation last month. 

A report from the U.S. Labor Department last week showed that inflation rose to 3.4% from 3.1% in November.

For Canadians, the largest price increases have hit necessities like shelter and food. 

Grocery prices in December were up 4.7% from a year ago, matching the pace of increase in November.

Housing affordability has also been another source of financial pain. Tuesday’s report finds the main contributor to inflation between December 2022 and December 2023 was mortgage interest costs, followed by rent. 

Shelter costs rose by 6% compared to a year ago.

With December marking the last month of the year, Statistics Canada says the average annual inflation rate for 2023 was 3.9%. That’s down from a 40-year high of 6.8% in 2022.

Price growth in 2023 slowed in six out of eight components of the consumer price index compared with the previous year.

As the Bank of Canada gears up for its interest rate announcement next week, it will be paying particular attention to core measures of inflation, which help the central bank see through volatility in price movements. These annual measures did not ease last month.

The Bank of Canada is broadly expected to continue holding its key interest rate at 5% as most economists are convinced interest rates are high enough to quash inflation.

However, the timing of the first interest rate cut is expected to be driven by how fast inflation falls and how sharply the economy softens this year.

Tu Nguyen, an economist at tax and consultancy firm RSM Canada, says the Bank of Canada should still shift to cutting interest rates soon, given housing is now the primary driver of inflation.

“Shelter inflation is caused by higher rents, which the bank cannot control because it’s a housing shortage problem for the whole country. The other part of shelter inflation is comes from mortgage interest payments. And that is directly caused by monetary policy,” Nguyen said.

Some forecasters are expecting the first rate cut as early as April, while others believe it may take until mid-year for the central bank to switch gears.

“Despite December’s report, we expect inflation, and the economy, will have cooled sufficiently by the spring for the Bank of Canada to make its first interest rate cut in April. That said, inflation is unlikely to be quite at 2%,” Preston wrote.