December 21, 2022 | 09:10
Jingle Bell, Inflation Fell...Just a tenth
Canadian consumer prices rose 0.1% in November, clipping the headline inflation rate just a tick to 6.8% from 6.9% in the two prior months. Despite the seemingly mild top-line dip, this is a disappointingly high reading, as November is normally a weak month for prices (seasonally adjusted prices were up a sturdy 0.4%). And, lower gasoline prices flattered the result. Core inflation trends were mixed, but mostly continued to grind higher, with the median up a tick to 5.0%, the trim holding at 5.3%, and ex food & energy nudging up a tick to 5.4%. The closely-watched 3-month trend in core CPI actually edged up to a 4.3% annualized pace from 4.0%. Again, not great. Food prices, meantime, just won't back down as groceries accelerated to an 11.4% y/y pace (from 11.0%).
Digging into the still-strong core results revealed some new areas of concern. After years of helping hold back inflation, cellular services rose 2.0% y/y (on "fewer promotions"), while rent took a big step up and is now a 30-year high of 5.9% y/y (from 4.7% last month). Mortgage interest costs, unsurprisingly, are another driving force now, rising 14.5% y/y—just six months ago, they were still below year-ago levels. The transition from inflation being goods-led to a services story continues apace, with services prices up 5.8% y/y, or double the pace a year ago.
Meantime, some goods prices are beginning to relent after shooting higher earlier on. Furniture prices are easing after sprinting at the start of the year; they are now up about 8% y/y after nearly a 16% increase in the year to June. Vehicle prices are still one of the major sources of inflation in the past year, but the 7.8% y/y rise appears to be losing a bit of steam. Clothing prices are little-changed from a year ago.
The early look-ahead to December is for a fairly large pullback in headline inflation. Gasoline prices are currently tracking a drop of almost 14% this month (compared with a 4% drop in Dec/21), which alone could pull headline inflation close to 6-1/2%.
Bottom Line: Turning the temperature down on inflation is proving to be an achingly slow process, and we suspect this may be a theme for 2023. While lower pump prices will help chop next month's rate, the fact that many measures of core inflation are still nudging higher is a clear warning sign of persistent underlying pressures. We are leaning to the view that the Bank of Canada hikes rates one more time in January to 4.5%, and this firm report does nothing to doubt that call. If anything, the stickiness in core trends around 5% or higher hints at the possibility of even further rate hikes later on—and that's something nobody is talking about.