Canada: Inflation Tiptoes in the Right Direction in November

Canadas inflation rate decelerated in November but key gauges of underlying price pressures trended higher, potentially dashing hopes for a pause in interest-rate increases.

Even though, Canadians got some relief at the pumps in November, with prices down 3.6% m/m, after prices surged 9.2% in October. However, gasoline prices are still up 13.7% versus a year ago.

Food inflation was back on the rise in November, up 10.3% y/y, up from 10.1% in October. Food purchased from stores was up even more versus a year ago at 11.4% y/y.

On net, underlying inflation pressures appeared to have picked up slightly in November. CPI ex-food and energy was 5.4% higher versus a year ago, a tick higher than 5.3% in October. Perhaps more importantly, the two measures that the BoC has indicated provided a more timely gauge of underlying inflation through the pandemic – CPI-trim and CPI-median showed no signs of cooling.

Shelter inflation accelerated again in November, up 7.2% y/y from 6.9% y/y. Upward pressure came from higher mortgage interest costs – which saw the highest increase since 1983 – and rents. Inflation for homeowners replacement cost did to 5.8% y/y thanks to a slowing resale market.

Last weeks inflation report was a step in the right direction, in line with forecast for a gradual cooling in inflation over the coming year. Core inflation pressures have been somewhat slow to cool, but are roughly consistent with our December forecast. Canadian consumers are showing signs of strain under the weight of high inflation and higher interest rates, with retail sales losing momentum in recent months. This is expected to translate to softer price pressures, which are starting to show up in categories like furniture and clothing.

Some forecasters expect Canada's economy to dip into recession next year along with a downturn in global activity. Which means The Bank of Canada will get to see another inflation report before their next interest rate announcement at the end of January. With the battle against inflation not yet won, expectation is that the Bank will hike a quarter point, and then take a pause to assess the cumulative impact of a year of dramatic tightening on the economy.