EconoFACTS

January 17, 2023 | 09:17

Canadian CPI — Some Progress, But Not There Yet

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Canadian consumer prices fell 0.6% in December, a tick below expected, pulling the yearly rate down half a point to 6.3% y/y. Headline inflation is down 1.8 ppts from the 8.1% peak hit in June, but remains well above the Bank of Canada's 2% target. Before getting too excited about the headline figure, recall that December is a seasonally weak month for inflation, as CPI fell just 0.1% m/m on a seasonally-adjusted basis.

The sizeable headline drop was driven by a 13.1% plunge in gasoline prices, which alone trimmed half a point in the month. Notably, gasoline prices were up just 3% y/y in December, after surging as much as 55% mid-year. Other areas of softness were recreation (-1.4% nsa, with gasoline providing a helping hand there as well) and household operations/furnishings (-0.8% nsa). The latter was driven by a record 4.1% drop in appliance prices, as easing supply chain issues start to unwind the rapid run-up in prices over the past couple of years. Clothing prices tend to be seasonally soft in December, but holiday discounting appears to have been lower key in 2022, as prices rose 0.8% on a seasonally-adjusted basis. Food had it's third smallest monthly increase of the year, though prices are still up 10.1% y/y, just a couple of ticks off the highs. Finally, shelter costs stayed firm, with mortgage interest costs continuing to surge, rent maintaining its recent momentum, while falling home prices and utilities provided only a small offset.

The core CPI metrics all slowed, but only marginally. CPI-Trim slowed a tick to 5.3%, while CPI-Median was also down a tick to 5.0%, though both were revised up a tick in the prior month. That's nine straight months above 5% for Trim, while Median has been hovering around 5% for eight months. The good old-fashioned CPI ex. food and energy was up 0.3% (seasonally adjusted), trimming the year pace a tick to 5.3%, and bringing the 3-month annualized rate to 3.7%, an 11-month low. Right direction, but not good enough to ease inflation worries yet.

Key Takeaway: Headline inflation was soft, as widely expected, due to seasonality and a big drop in gasoline prices. Core inflation eased ever-so-slightly, but the slow pace of improvement will bring little comfort to policymakers. Underlying price pressures remain sticky for now. While the direction of inflation is at least mildly encouraging, there's nothing in this report to keep the Bank of Canada from hiking rates another 25 bps at next week's policy meeting.

Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics