Following December’s bump, inflation expected to rise

Canada’s annual pace of inflation ticked higher in December, but the rate was weaker than expected as lower food prices helped offset increases in the transportation and shelter groups.

Statistics Canada said Friday the consumer price index in December was up 1.5% from where it was a year ago, a higher rate of inflation compared with November’s increase of 1.2%.

Economists had expected a bigger increase of 1.7% year-over-year in December. Nick Exarhos, Director at CIBC World Markets, says, “Headline CPI gained three ticks [but was] slightly softer than what the street was looking for, as soft food prices restrained the monthly change. The average level of the Bank of Canada’s new core measures also looked slightly hotter, with two of the three metrics a tick firmer than last month’s readings.”

Prices were up for seven of the eight major categories compared with a year earlier, with food being the one exception.

Exarhos says markets had little reaction to the data. Going forward, he predicts, “By the second half of the year, [Headline CPI] should be tracking above the Bank of Canada’s 2% target, as a rebalancing in the crude market produces sustainably higher gas prices and base-year effects no longer depress food prices.

“Still, with measures of core showing only modest momentum, the Bank flagging a wide output gap, and wage growth stagnating, inflation is likely to be a secondary issue over the next several months.”

He expects that “a strong print in retail volumes supports a 0.3% reading on monthly GDP for November, and Q4 growth of 1.5%.”

The details

The transportation index was up 3% in December compared with a year ago, while the shelter index rose 2.1%.

In contrast, Statistics Canada says the price of food fell on a year-over-year basis for the third consecutive month. Prices for food in December fell 1.3% compared with a year ago.

Statistics Canada says the pace of inflation increased in six provinces in December compared with November, while inflation in two provinces was unchanged and it fell in two other provinces.

For the full year, the average annual increase in the consumer price index was 1.4% in 2016. That compared with 1.1% in 2015 and 2% in 2014.

Excluding gasoline, the annual average rise in the consumer price index was 1.8% in 2016, following a 2% increase in 2015.

In addition to the inflation report, Statistics Canada reported Friday that retail sales climbed 0.2% in November to $45.2 billion.

Economists had expected a bigger increase of 0.5%, according to Thomson Reuters.

Sales were up in five of 11 subsectors with the overall increase due in large part to higher sales at motor vehicle and parts dealers and building material and garden equipment and supplies dealers.

Retail sales in volume terms increased 0.7%.