In this file photo, a shopper leaves a Toronto supermarket with groceries. Statistics Canada said on Tuesday that the annual rate of inflation fell to 6.3 per cent in December. Alex Lupul/The Canadian Press
Canada’s inflation rate eased in December along with a sharp drop in gasoline prices, an encouraging sign for the Bank of Canada as it mulls more rate hikes.
The consumer price index (CPI) rose 6.3 per cent year-on-year in December, up from 6.8 per cent the previous month, according to figures released Tuesday by Statistics Canada . Financial analysts expected an inflation rate of 6.4 percent.
Consumer prices fell 0.6 percent in December, highlighted by a 13 percent drop in gasoline, the largest decline since the start of the COVID-19 pandemic.
Excluding food and energy – two of the most volatile components of the CPI – prices rose 5.3 percent on an annual basis, down slightly from November’s 5.4 percent.
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There have been several promising trends for consumer price growth over the past few weeks. US inflation continues to decline while prices for many resources — such as timber and natural gas — have declined. Businesses in various industries reported that supply chain disruptions – a major factor in recent price increases – are also improving.
“Obviously Canadians had a pretty big boost in December with the drop in gasoline prices. That left more money in Canadians’ pockets to spend elsewhere,” said Royce Mendes, head of macro strategy at ‘ Desjardins Securities, in an interview.
However, Mr. Mendes warned that headline measures of inflation were proving sticky, remaining well above the Bank of Canada’s 2% target.
“The job is far from done to get inflation back to 2 percent,” he said.
Tuesday’s inflation report will be a key consideration for the Bank of Canada as it weighs whether to raise interest rates on January 25 for the eighth month in a row.
The central bank says it is nearing the end of its rate hike campaign, with decisions dependent on economic data. Many analysts expect the bank to raise interest rates by 25 basis points to 4.5 percent next week, especially after strong employment growth in December. (A basis point is 1/100th of a percentage point.) The federal funds rate was 0.25 percent through March 2022.
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The hiking cycle appears to be having its intended effect, according to two Bank of Canada surveys released on Monday. Consumers say they are cutting back on spending in response to high inflation and rising interest rates, while a growing proportion say they are delaying purchases. Many companies, meanwhile, expect sales to decline in the coming year.
Tuesday’s report showed signs of weaker consumption. Growth in the price of durable goods is slowing rapidly. For example, the cost of home appliances fell by 4.1 percent in December, the largest monthly decline on record. Furniture prices also fell.
“This slowdown in price growth is due to easing supply chain pressures and lower shipping costs and weaker demand,” Statscan said in its press release.
At the same time, there are persistent aspects of high inflation. Food prices rose 11 percent year-on-year in December, compared with 11.4 percent in November. Those prices are still rising near multi-decade high rates, a continuing frustration for consumers.
Interest costs on mortgages have risen by 18 per cent over the past year due to the rapid rise in lending rates. This, in turn, makes it harder for people to qualify for a mortgage and keeps the demand for rental housing high. Rents increased by 5.8 percent over the year.
Mortgages are the largest contributor to annual inflation today, while rents are the third largest contributor.
Statscan also found that prices for personal care items – including soap, cosmetics, and other products – rose 9.9 percent, the fastest annual pace of growth in nearly four decades.
