December’s Inflation Surge in Canada Leaves Rate Cut Prospects in the Dust

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In December, Canada's annual inflation rate demonstrated an increase from 3.1% in November to 3.4%, aligning with economists' predictions, as per Tuesday's data release. Consumer prices on a monthly basis followed suit, meeting expectations by declining 0.3% from November.

Canada's national statistical agency attributes the yearly inflation uptick primarily to elevated gasoline prices compared to the same period last year, despite a four-month consecutive decline in prices.

When excluding gasoline, year-over-year inflation showed a slight deceleration from 3.6% in November to 3.5% in December. Notably, food prices purchased in stores rose by 4.7% in December, mirroring November's levels. Excluding both energy and food, the annual inflation rate dipped to 3.4% from November's 3.5%.

Key indicators of core inflation tell a nuanced story, with the CPI-trim experiencing a slight uptick to 3.7%, while the Median Consumer Price Index held steady at 3.6%.

Since March 2021, headline inflation has consistently surpassed 2%, residing within the central bank's target range of 1-3%.

The Bank of Canada implemented a key rate hike of 5% from March 2022 to July 2022 to combat inflation. With the next interest rate meeting scheduled for January 24, it's anticipated that the rate will remain steady. That being said, both money markets and economists predict that the Bank of Canada may commence rate cuts in the first half of 2024.

Initially projecting inflation to meet targets by the close of 2025, Bank of Canada’s Governor Tiff Macklem, in his last address of 2023, informed reporters that he now anticipates inflation to be in proximity to targets by the end of the current year.

The Canadian economy experienced a halt in growth in October. As per a Monday release of a Bank of Canada survey, Canadian companies reported a decline in orders during the fourth quarter. This downturn is attributed to restrictions on consumer spending resulting from elevated interest rates. Additionally, companies anticipate a decrease in inflation.