'Too warm for the BoC's liking': What economists say about the latest inflation numbers

CPI comes in hotter than expected

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November inflation numbers appear to confirm that Bank of Canada governor Tiff Macklem was right when he said last week that Canadians should expect some push and pull in the fight against high prices.

Canada’s annual inflation rate was unchanged last month, holding steady at 3.1 per cent, above the Bank of Canada’s target range. Analysts had expected the consumer price index would rise 2.9 per cent.

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Increases in the cost of travel kept inflation higher, offsetting slower growth in prices for food, cellular services and oil, Statistics Canada said Tuesday.

Housing inflation remains a persistent problem.

Statistics Canada said mortgage interest costs increased 29.8 per cent from last year, while rental costs rose 7.4 per cent. They were among “the largest contributors to the year-over-year increase in November.”

Macklem said in a speech on Dec. 15 that further decreases in price pressures will be gradual and that it is premature to talk about interest rate cuts.

The bank’s benchmark lending rate stands at 5 per cent — a 21-year high — following an aggressive hiking campaign by Macklem and his team to tame runaway inflation.

Core readings also rattled outlooks for inflation.

The Bank of Canada’s two favoured measures were up 3.6 per cent and 3.5 per cent month over month annualized, while the consumer price index excluding the eight most volatile items rose 4 per cent in November annualized.

“These are all far too warm for the BoC’s liking,” said Derek Holt, an economist with Scotiabank.

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Still, economists cited some improvements in the inflation data.

Food, a major inflation culprit in this cycle, grew of 2.6 per cent over the past three months, down from a peak of over 14 per cent in 2022, according to National Bank of Canada economists Matthieu Arseneau and Alexandra Ducharme.

The number of items making up the consumer price index that increased more than 5 per cent continued to narrow falling to 32 per cent from 36 per cent in October, said Charles St-Arnaud, chief economist with Alberta Central.

“The improvement in these measures suggests broad-based deceleration in inflation, something that will be welcomed by the BoC,” St-Arnaud said.

Here’s what economists are saying about the latest inflation numbers and what they mean for the Bank of Canada.

Andrew Grantham, CIBC Economics

“If there is any good news in today’s report it is the fact that, with drivers of inflation becoming more narrowly based than they were earlier in the year, the Bank of Canada’s preferred core measures of CPI-trim and CPI-median continued to show softer trends than earlier in the year at 3.5 per cent and 3.4 per cent year over year respectively. On a three-month annualized basis the core measures were softer, at 2.3 per cent and 2.6 per cent respectively. While readings on a three-month annualized basis are admittedly volatile, if such a trend were to persist for another few months it should give the Bank of Canada comfort that headline inflation is on a path back to target, opening the door for interest rate cuts starting in Q2 next year despite the upside surprise in headline inflation today.”

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Stephen Brown, Capital Economics

“It seems we cannot blame travel tours for stronger core inflation pressures entirely, however, because the CPI-trim and CPI-median indices – which exclude large price changes in either direction – both rose by a larger 0.3 per cent month over month, the strongest average gain in three months. That kept the annual core inflation rates unchanged at an average of 3.5 per cent. The upshot is that our forecast for the first interest rate cut in March is looking less likely although, given there are still another two CPI reports before that meeting, we are not minded to change our forecast for now.”

Leslie Preston, TD Economics

“Governor Macklem may be humming All I want for Christmas is two (per cent), but he is going to need to wait a little longer for that gift. Canada’s economy has cooled in recent months, and inflation is slowly feeling the chill. We expect weaker demand in the economy will gradually see inflation come down enough for the Bank of Canada to cut rates in the second quarter of next year.”

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Douglas Porter, BMO Economics

“Today’s moderately disappointing result drives home the point that we still have an inflation fight on our hands — in case there was really any doubt. Still, the bigger picture remains intact: The underlying inflation trend is lower, the economy is chilly, and the Bank is expected to begin trimming rates around mid-year. As an aside, this result will not be a big shock to the bank, as it had pencilled in an average inflation rate of 3.3 per cent for Q4 in its latest forecasts (which now looks doable, with December likely to print higher). Still, the latest result reinforces the message that markets had been a bit aggressive in their pricing of early and often rate cuts.”

Charles St-Arnaud, Alberta Central

“Unchanged headline inflation and core inflation and the expected rise due to base effects in the coming months will provide reasons for the BoC to remain cautious on inflation. As such, we believe it may still be too early for the BoC to officially declare victory. Looking ahead, the BoC is unlikely to contemplate rate cuts until inflation has been brought sustainably below 3 per cent. This is unlikely to happen until the spring.”

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Claire Fan, RBC Economics

“If anything, the release today serves as a reminder that inflation readings can still be ‘sticky,’ and why we continue to expect a cautious approach as the BoC starts to think about when to begin cutting interest rates. Our expectation is for the first rate cut to come around mid-year 2024, contingent on further (but widely expected) softening in CPI readings in the months ahead.”

David-Alexandre Brassard, CPA Canada

“The story remains the same, housing costs are driving inflation and keeping it over 3 per cent, higher than many expected. Overall inflation pressures are easing with monthly price growth sustainable at 0.1 per cent for two months straight. This will do little to change the tone of the Bank of Canada which is unlikely to declare victory over inflation until we see a few readings under 3 per cent. Only then, will they consider rate cuts.”

Matthieu Arseneau and Alexandra Ducharme, National Bank of Canada

“We don’t put too much emphasis on the slight reacceleration in inflationary pressures in November. We have repeatedly pointed out that inflation is a lagging indicator of economic conditions and that it would be dangerous to base future monetary policy solely on current price pressures given the lag in its transmission to the economy. The latter is showing signs of weakening, with consumption stagnating over the past two quarters and the unemployment rate rising substantially since last April. With the timeliest indicators suggesting further deterioration in the months ahead, inflation seems less and less of a concern for the coming year.”

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Derek Holt, Scotiabank Economics

“Sorry but I just can’t hop on the bandwagon. In my professional opinion, November’s core inflation readings leaned more toward continued hike risk than toward market pricing for a cut by March/April that would be a major policy error right into the thick of the spring housing market and winter government budget season. For now, however, this is short-term data noise for a central bank that is saying it wants a lot of data before doing much of anything.”

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