Economists expect December inflation to have risen, but the trend still points to a slowdown


Economists forecast Canada’s inflation rate likely rose last month, but that is not expected to raise alarm bells as underlying price pressures ease.

Statistics Canada is scheduled to release its December consumer price index report on Tuesday, offering a look at the headline inflation rate for 2023.

Forecasters expect December’s rate to surpass November’s 3.1 percent, as gasoline prices fell more significantly a year ago than last month. The effect of a price movement that occurred one year ago on the inflation rate is called the “base year effect.”

CIBC forecasts the inflation rate to be 3.4 percent.

“This has really been driven simply by the base effects of gasoline prices. And we expect to see some further improvement in some of the core measures that the Bank of Canada watches closely,” said Andrew Grantham, executive director of economics at the Bank of Canada. CIBC.

A report from the U.S. Department of Labor showed this week that inflation rose last month south of the border, reaching 3.4 percent. That increase from 3.1 percent in November was driven by higher housing costs as well as energy and food prices.

But even if annual inflation rose last month, economists say that doesn’t mean price growth is headed in the wrong direction.

The Bank of Canada focuses particularly on core inflation measures, which exclude volatility in price movements.

If those numbers fall, it would suggest that price pressures have continued to fade, giving the central bank some relief.

In the United States, despite the rebound in headline inflation, core prices rose 3.9% in December, their slowest pace since May 2021.

The central bank also pays attention to how inflation has evolved in recent months, rather than simply the change in prices from a year ago.

TD Economics Director James Orlando says he expects December inflation to hit 3.3 percent.

But he says inflation has slowed considerably in recent months, with the three-month annualized rate for some of the basic inflation measures hovering between two and three percent.

“I think that’s what people should probably hold on to, because that’s really what’s going to drive the year-over-year (number) for the next few months,” Orlando said.

Food inflation is also expected to continue to slow. Grocery prices have risen at a slower pace in recent months, rising 4.7 percent year-on-year in November.

But Grantham points out that doesn’t mean affordability will improve for families when it comes to food, because inflation still means prices are rising, albeit at a slower pace.

“Unfortunately, for households, including mine, that’s still an increase, and that’s still being built on… which is a very high price level, compared to where we were two or three years ago,” he said. .

The central bank opted to hold its key interest rate steady at five percent through the fall of 2023 as inflation continued to decline.

Looking ahead this year, economists generally expect the central bank to opt to cut interest rates once it is more confident that inflation is heading toward its two percent target.

“This year will be about when inflation will be low enough for the Bank of Canada to feel confident reducing interest rates from the very high levels they are currently at,” Grantham said.

The Canadian economy has also cooled significantly, reassuring the Bank of Canada that the economy is no longer overheated.

This economic slowdown is expected to further ease price pressures, allowing the central bank to change course soon.

Governor Tiff Macklem has noted that the central bank does not need to see inflation reach two percent to start cutting rates, but it does need evidence that it is sustainably moving in that direction.

— With files from The Associated Press

This report by The Canadian Press was first published Jan. 14, 2024.

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