EconoFACTS

January 16, 2024 | 09:08

A Beef With Inflation

Economist

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Canada's headline inflation rate backed up three ticks in December to 3.4%, in line with consensus, as gasoline prices simply did not fall nearly as fast as a year ago. Consumer prices dipped 0.3% in the month, but December is always a soft month for prices (in seasonally adjusted terms they rose a sturdy 0.3% m/m, albeit a tick less than we anticipated). The good news is that the back-up in headline inflation should last only a month, as base effects are easier next month and gas prices are aiming for another small dip in January.

The news was a bit more challenging for core inflation, as the BoC's two main measures were both above headline—trim rose two ticks to 3.7%, while median was 3.6% (the prior month was revised up two ticks to that same level). The shorter term metrics picked up for both, with each rising 0.4% m/m (s.a.), lifting trim 3.8% a.r. over the past three months and median 3.5%; not great, and suggesting (yet again) that core is sticky around the 3.5% range. Excluding food & energy, prices rose 0.2% (s.a.), trimming the yearly rate to 3.4%, right in line with headline; in other words, food & energy combined are now neutral for inflation.

Details, details: The tiny reprieve in rent lasted only a month, with that category picking back up to a 7.7% y/y clip (from 7.4%). Mortgage interest costs remain the number one driver of inflation on a yearly basis (up 28.6%), although the monthly increases are cooling somewhat (still up 1.8% m/m). Excluding this one component, inflation is a mild 2.5% y/y (but up from just 2.2% in November). On the soft side, the broad recreation category posted its largest monthly drop on record (-3.4%), thanks to a 14.7% plunge in travel services and a 7.2% drop in home entertainment equipment (both record declines, in data going back to the 1950s). While there is clearly seasonality here, the outsized declines hint strongly at softening discretionary spending. On the sticky side of the ledger, grocery price inflation stayed steady at 4.7% y/y, while restaurant meals perked up to 5.6%. And, yes, beef prices remain robust at 10.6% y/y.

For all of 2023, headline inflation averaged 3.9%, a snick below the 4.1% average rise in U.S. prices. While down from the towering 6.8% surge in 2022, that was still the second fastest rise in consumer prices for a full year since 1991. We look for inflation to average a somewhat milder 2.8% in both economies this year.

Bottom Line: While the higher headline was little surprise, and precisely mimicked the U.S. inflation experience in December, the slightly more unsettling news is the persistence of core in the mid-3s. That sticky theme was echoed in yesterday's BOS, and suggests that the last mile (or kilometre) of the inflation fight may prove to be the most challenging—bringing underlying inflation sustainably back below 3%. Given that wage trends are also stuck in the 4%-to-5% range, and now even housing may be showing a pulse, suggests that the Bank of Canada will doggedly maintain a cautious stance at next week's rate decision and MPR. We are comfortable with our call of a first rate cut at the June meeting, even as the market leans in earlier.

Table 1 - Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics