Inflation concerns persist in Toronto, as annual inflation rates for December, revealed in recent data, align with expectations and sustain underlying price pressures. This outcome dampens expectations of an early shift to rate cuts by the central bank.
Statistics Canada reported that annual inflation rose to 3.4% in December, up from 3.1% in November, in line with economist estimates from a Reuters poll. On a monthly basis, consumer prices also met expectations by declining 0.3% from November.
Two of the Bank of Canada’s core measures of underlying inflation, CPI-trim and CPI-median, accelerated during this period. The three-month annualized rate for these measures rose to 3.6% from an upwardly revised 2.9% in the previous month, according to Royce Mendes, head of macro strategy for Desjardins Group.
Mendes expressed disappointment, stating that the persistence of core inflation measures hinders hopes of an imminent rate cut.
Headline inflation has remained above the Bank of Canada’s 1-3% target range since March 2021. The central bank had previously raised its key policy rate to a 22-year high of 5% between March 2022 and July 2023 to combat inflation. The Bank’s next interest rate announcement is scheduled for January 24, with expectations leaning towards maintaining the current key policy rate.
Following the release of the data, money markets saw a reduced likelihood, dropping from nearly 50% before the figures, that the Bank of Canada would initiate interest rate cuts in March. Nevertheless, a substantial probability remains for a 25-basis-point reduction in April.
Derek Holt, vice president of capital markets economics at Scotiabank, cautioned that multiple factors must align favorably for rate cuts to commence by summer, let alone earlier in March or April.
The annual inflation rate was mainly driven by elevated gasoline prices compared to the same period a year ago. Airfares, fuel oil, passenger vehicles, and rent also experienced acceleration. Food purchases from stores increased by 4.7% year-on-year, mirroring the previous month.
The acceleration of core inflation indicates that the Bank of Canada will require further evidence of progress before contemplating a shift towards looser monetary policy, as noted by Andrew Kelvin, chief Canada strategist at TD Securities.
Excluding energy and food prices, the annual inflation rate slowed to 3.4% from 3.5% in November.
While the Canadian dollar recovered some of its earlier losses, it remained 0.3% lower at 1.3460 against the U.S. dollar as the greenback strengthened against a basket of major currencies.
Previously, the Bank of Canada had projected that inflation would reach its target by the end of 2025. However, Governor Tiff Macklem, in his final public appearance of 2023, suggested that it might approach the target sooner, potentially by the end of the current year.
Canada’s economy experienced stagnation in October. In the fourth quarter, Canadian businesses reported a decline in their order books due to interest rate impacts on consumer spending, and they anticipate a moderation in inflation, according to a Bank of Canada survey published on Monday
