The rate of inflation in Canada surprisingly stays stuck at 3.1%, pushing the central bank to maintain its policy rate, which is at the highest level in two decades.
Thus, it becomes crucial to understand how this steady inflation rate impacts the broader economic landscape.
In November, the consumer price index climbed 3.1% compared to the previous year, mirroring the rate of inflation in Canada from the preceding month, as per Statistics Canada’s report on Tuesday in Ottawa.
This acceleration exceeds the median estimate of 2.9% according to a Bloomberg survey of economists. The consistent rise in the inflation in Canada raises questions about the ongoing economic trends and challenges facing policymakers.
Benjamin Reitzes, a rates and macro strategist at Bank of Montreal, noted, “This report should quiet the rate cut chatter a bit, at least for now.”
He emphasized that while the report was on the firm side, it didn’t alter the broader narrative of a soft economy and slowing inflation.
Canadian Dollar Surges as Inflation in Canada Stays Elevated
At 9:41 a.m. Ottawa time, the Canadian dollar experienced a sharp increase to C$1.334 per US dollar, reaching its highest intraday level since August 4.
Simultaneously, bond markets saw a sell-off, leading to the benchmark two-year note’s yield surpassing 4%.
The Bank of Canada closely monitors two significant yearly inflation measures, namely the trim and median core rates, which exclude components with more erratic price swings.
Both of these rates remained unchanged, averaging 3.45% year-over-year. This surpassed economists’ expectations, who had anticipated a slower pace at 3.35%.
Month-on-month, the consumer price index showed a 0.1% increase, contrary to the anticipated 0.1% decrease.
Unexpected rise diverges from economists’ predictions, adding a layer of complexity to understanding short-term inflationary patterns.
Another crucial metric, the three-month moving average of underlying price pressures, declined to an annualized pace of 2.45%, down from 2.86% a month prior, as calculated by Bloomberg.
Mortgage interest costs continue to be the primary driver pushing up the consumer price index, contributing significantly to the inflation in Canada.
If shelter costs are entirely excluded, the rate of inflation in Canada drops to 1.9%, emphasizing the influential role of housing-related expenses in the overall inflationary picture.
Simply put, the headline inflation in Canada is influenced by the consequences of the central bank’s previous rate hikes on housing and the notable rise in immigration, contributing to increased rents.
According to Statistics Canada, the population surged by approximately 430,635 people in the third quarter, marking the highest percentage growth in a single quarter since 1957 at 1.1%.
Policy Challenges Amid Economic Headwinds
The figures from Tuesday mark a setback for policymakers, especially after maintaining the central bank’s overnight rate at 5% for the third consecutive meeting last month.
Despite this, it’s unlikely to shake Bank of Canada Governor Macklem and his officials, who anticipate a softer economy to play a role in moderating the pace of price increases in the upcoming months.
Their focus remains on the broader economic conditions and their potential impact on inflation trends.
Despite the disappointing inflation in Canada, Macklem stated that any easing is anticipated around 2024, contingent on observing sustained downward momentum in core inflation over several months.
BoC’s Monetary Policy Alignment With Global Central Banks
The upcoming inflation report is the first of two before the Bank of Canada’s next rate decision on Jan, 24th.
According to a Bloomberg survey, the majority of economists anticipate the bank to maintain unchanged borrowing costs. Given signs of economic stagnation and the projection of a further slowdown in inflation, many economists suggest that rate hikes for this cycle are likely concluded.
This perspective reflects an expectation of stability in monetary policy amid evolving economic conditions.
In line with the US Federal Reserve’s decision to maintain interest rates for the third consecutive meeting, the Bank of Canada is echoing a similar sentiment.
Governor Macklem, akin to officials at the Bank of England and the European Central Bank, has emphasized that it’s premature to contemplate easing measures, despite the Fed signaling the end of its hiking campaign and anticipating cuts next year.
In a recent speech, Macklem expressed his anticipation that Canadian inflation will approach the 2% target by the end of next year.
He is attributing this to the impact of past interest rate increases restraining spending, limiting growth, and affecting employment.
However, he emphasized that policymakers will consider rate cuts only when they are confident about a clear path back to price stability.
November Inflation Data in Various Departments
In November, services inflation remained steady at 4.6%, while goods inflation saw a slight increase to 1.4%.
Major contributors to the Consumer Price Index included mortgage interest costs, registering a 29.8% change from the same month last year, along with rent and food.
Conversely, gasoline, telephone services, and natural gas exerted downward pressure on the inflation rate.
Regionally, prices demonstrated a slower year-over-year pace in six out of ten Canadian provinces compared to October.
Quebec led with the highest inflation rate at 3.6%, reflecting variations in economic dynamics across different regions within Canada.
In a month-on-month comparison, the headline Consumer Price Index (CPI) experienced a 0.2% decrease, contrary to the consensus forecast of a 0.1% increase.
Meanwhile, Core CPI, which excludes volatile categories like food, energy, alcohol, and tobacco, stood at an annual rate of 5.1%, notably below the forecasted 5.6%.