Inflation rises to 3.4% in December, complicating path for Bank of Canada

Canada’s annual inflation rate rose to 3.4 per cent in December, marking another bump along the way back to price stability for the central bank.

Statistics Canada released its consumer price index report Tuesday, showing inflation ticked up from 3.1 per cent 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.

But 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 two per cent is the hardest,” wrote Leslie Preston, a managing director and senior economist at TD.

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

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

The main contributor to the rise in prices between December 2022 and December 2023 was mortgage interest costs, followed by rent.

Overall, shelter costs were up six per cent compared to a year ago.