January 19, 2022 | 09:21
Canadian consumer price inflation forged further ahead to 4.8% y/y in December, the fastest pace in 30 years. What passes for good news these days was that the headline figure landed right on expectations. In unadjusted terms, prices actually dipped 0.1% from the prior month, amid a 4% drop in gasoline prices and usual seasonal discounting. However, the underlying picture is less reassuring after seasonal adjustment, where prices rose 0.3% m/m, and are up at a 4.8% a.r. in the past three months and at a 5.7% clip in the past six. As well, all of the major measures of core inflation stepped up further in the month. The BoC's three primary metrics rose to an average pace of just over 2.9% y/y (from 2.7% y/y), also a 30-year high and within inches of the 3% upper target boundary. Still, Canadian trends actually remain on the "mild" side of the G7, with the U.S. leading the way with 7% (and 5.5% core), the U.K. printing 5.4% today, and the Euro Area expecting a 5% headline pace.
While the overall picture met expectations, there were some notable moves beneath the surface. Airfares took a big step up last month and are now up a huge 27.4% y/y (but up just 1.4% y./y in the U.S.). Another source of strength was in home insurance, where rates saw the biggest monthly hike since the 80s and are now up 9.3% y/y. Grocery prices continue to march higher, as a pop in fresh fruit powered up the overall annual rise a full point to 5.7% y/y. And vehicle prices rose again to 7.2% y/y. On the moderating side, clothing prices did not match the surprising rise seen stateside, and are up just 0.4% y/y.
Looking ahead, the fast rebound in energy prices suggests that the temporary respite on that front could be more than fully reversed in a single month. They are currently tracking roughly a 5% rise this month. However, they also surged last January—and this is where the so-called base effects turn more favourable in 2022. Still, the steady rise in underlying prices suggests that there is sustainability to the upswing in inflation, especially if oil prices keep flaring higher. Even with our more moderate assumption on energy costs, we had anticipated inflation to average 3.5% for all of this year, a tick higher than the official estimate for all of last year (3.4%).
Bottom Line: Canadian price trends were no worse than expected for the second month in row, and were actually a touch lower than the Bank of Canada expected for all of Q4. Still, make no mistake, inflation looks to have plentiful staying power, with oil prices on the march, firms reporting intense labour shortages, and core inflation grinding up. So, even with one of the "milder" inflation rates in the G7, the stage is nevertheless set for the Bank of Canada to soon kick into tightening gear. Our view is that the Bank will tee up a March move at next week's meeting, although we cannot rule out more immediate action (and the market is leaning heavily that way). A more interesting debate is just how far the Bank will ultimately need to go on the rate front to bring inflation under better control—and that's where Canada's calmer core trends versus others could be key. At this point, we believe that the combination of a speedy return to neutral rates, QT, and some presumed relief on the supply side could all do the job.