Canada November CPI dashes rate cut optimism

Heading into today's release of consumer price data for November, Canadian markets were almost unanimously expecting the headline rate to fall below 3 percent year-on-year, which would put it inside the Bank of Canada's 1-3 percent target range. This expectation was driving hopes that the Bank might start cutting official rates in the first half of 2024. 

In the event, the data confounded those expectations. According to Statistics Canada, headline CPI came in at 3.1 percent year-on-year, exactly the same pace as in October. With further weakness in energy prices (both for gasoline and heating oil) putting downward pressure on the headline figures, most of the widely-followed special aggregates remained well above the target range, with all items except energy up 3.8 percent and all items except food and energy rising 3.5 percent, up from 3.4 percent in October. 

To be sure, there are a few positives in the data.  Most notably, the year-on-year rise in food prices slowed for a fifth consecutive month. although it still stands at 5.0 percent. Less positively, shelter costs continue to increase, rising 5.9 percent from a year ago, led by a 29.8 percent rise in mortgage interest costs. There was also a startling 26 percent rise in the cost of travel tours: evidently, even as Canadians tell pollsters that their financial situation is dire, they are still finding the cash for a winter break. Finally, looking at the Bank of Canada's three preferred measures of core inflation, we find that two of them rose at the same pace in November as in October -- and the only one that decelerated, "CPI-Common", seems to have fallen out of favour in the eyes of the Bank.

So where does all this leave the Bank and the markets?  Governor Tiff Macklem spoke to the Canadian Club Toronto late last week.  While it is not certain that he had an early sneak peek at today's data, the impact of the November CPI numbers can certainly be judged from what he had to say.  Specifically:

Inflation was 3.1% in October, but that remains well above the 2% target. And it’s too high in key categories of goods and services, like food and rent. 

That was certainly still true for the November data.  And...

We expect growth and jobs to be picking up later next year, and inflation will be getting close to the 2% target.

"Well above the 2 percent target" implies that even if CPI had moved into the target range in November, as markets had expected, the Bank would not have been impressed. And "later next year" implies that unless the real economy faces a severe setback, which is certainly not the Bank's forecasts, the rate cutting cycle is unlikely to start before mid-year.