Canada CPI: year-on-year numbers continue to mislead

OK, so here's the headline number that the media are focusing on: Canada's year-on-year consumer price index rose 6.8 percent in November, compared to a 6.9 percent rise in October. Market expectations had been for a 6.7 percent print, so the data mean the Bank of Canada has more to do on the tightening front.

And here's a better way of looking at it: Canada's CPI rose 0.1 percent month-on-month in November. That's identical to the rise seen in September, and suggests that the gasoline-propelled 0.7 percent monthly increase in October was an anomaly. Even if we include that October number, the annualized rate of increase in headline CPI for the past three months comes in below 4 percent. This suggests that Bank of Canada tightening is already having a significant effect, so no further tightening is likely to be needed. 

Looking beyond the headlines, we find that a major contributor to the lower monthly print in November  was a 3.6 percent fall in gasoline prices, partially reversing the 9.2 percent spike seen in October. Even with the latest decline, gasoline prices remain 13.7 percent higher than a year ago. December has seen further weakness in prices at the pumps, suggesting that this factor will exert a downward bias on overall CPI for the month.

Food price trends are less reassuring. Prices for food purchased from stores (i.e. as opposed to restaurant meals) jumped 1.2 percent in the month, pushing the year-on-year rise to 11.4 percent, up from 11.0 percent in October. There is also upward pressure on shelter costs: mortgage interest costs were 14.5 percent higher in November than a year ago, indicating that Bank of Canada rate hikes are directly increasing the very inflation they are intended to reduce. 

So-called special aggregates are generally showing slower inflation than the headline numbers. Ex-food CPI actually fell 0.1 percent in November, for a year-on-year increase of 6.2 percent. The index ex food and energy rose just 0.1 percent in the month, for a year-on-year increase of 5.4 percent. And we mustn't forget the Bank of Canada's preferred core inflation measures, much as the Bank might wish that we would. These measures are showing little sign of easing; two of the three moved higher in the month, and the mean reading now stands at 5.7 percent. 

It remains a mystery that the Bank of Canada, like the Fed, makes little or no effort to push the message that the running rate of inflation is well below the year-on-year rate. Instead, it allows the media to focus on the seemingly glacial pace of reduction in year-on-year CPI. Perhaps the Bank is reluctant to declare victory too soon, in case some unexpected development comes along and pushes prices back up again. What is certain is that the November data either completely justify another rate hike in early 2023, or mean that rates have already peaked, depending entirely on how you choose to read the numbers.