Canada CPI -- more good news, but is it enough?

Statistics Canada reported this morning that the year-on-year rise in headline consumer prices slowed to 6.3 percent in December from 6.8 percent in November. On an unadjusted basis, headline CPI fell 0.6 percent month-to-month, the largest decline since the peak of the first wave of the COVID pandemic in April 2020.

The details of the report paint a somewhat more nuanced picture than the headline, but there can no longer be any doubt that Canada's inflation trend, like that in the US, has turned lower. The biggest contributor to the lower headline number rate was a 13.1 percent fall in gasoline prices, which now stand only 3 percent higher than they did before the Russian invasion of Ukraine. In contrast the headline number for food prices looks less encouraging at first blush. The year-on-year figure that the media like to focus on is 10.1 percent (and an even higher 11 percent for groceries), but the month-on-month increase is a much more encouraging 0.3 percent, which annualizes to less than 4 percent.

Core CPI, defined to exclude food and energy costs, fell 0.1 percent in December, for a year-on-year increase of 5.3 percent, just a tick lower than the November reading.  It might be noted that fastest-rising component of core CPI is now shelter costs, which stand 7 percent higher than a year ago. A large component of this is of course rising mortgage costs, which are being pushed up by the aggressive Bank of Canada rate hikes that are supposed to help bring inflation down.

The Bank of Canada's three preferred measures of core inflation all turned slightly lower in the month -- welcome news, although it is not clear that the Bank pays much attention to these any more. The interest rate decision due on January 25 will depend on whether the Bank is convinced that the tame monthly data seen in recent months really mark a sustainable change in the underlying trend. With the headline and core figures still above the target range, a further small rate hike to underscore the Bank's resolve seems the likeliest outcome, so look for a 25 basis point move, coupled with hints of a possible pause.