Canada December CPI: nothing (much) to see here

Data released by Statistics Canada today show that headline consumer prices rose 3.4 percent in December from a year ago, after increases of 3.1 percent in the two preceding months. The uptick was largely expected by analysts, and reflects some slightly tricky quirks in the calculation, so pay attention at the back there.

The CBC website headlines its report on the data thus: "Gasoline prices help drive inflation up to 3.4 percent".  Except, guess what, gasoline prices actually fell in December, dropping 4.4 percent from the previous month.  The thing is, gas prices dropped even more sharply than that in December 2022, so what actually happened in December 2023 was an example of the so-called "base effect". The shift in the headline year-on-year number had more to do with what happened a year ago than with what is happening now.  Just to underline that point further, headline CPI (not seasonally adjusted) actually fell 0.3 percent month-on-month in December, a fact that does not seem to have registered with the headline writer. 

Stripping out gasoline prices, the inflation rate actually eased slightly in December, falling to 3.5 percent from the previous month's 3.6 percent reading. Shelter costs continue to exert upward influence on the overall price level, rising 6.0 percent from a year ago, led by a 7.7 percent increase in rents. The Bank of Canada's three preferred core inflation measures showed little change in the month, although one of the three, CPI-trim, edged slightly higher.

There is not much in today's data to change the Bank of Canada's thinking about the future course of interest rates. It remains the case that key measures of inflation are too far above the 2 percent target to allow for any early rate reductions, however enthusiastic markets may be about that prospect. The Bank's Survey of Consumer Expectations for Q4/2023, published on Monday, notes that Consumers perceive inflation to have decreased, and their expectations for price growth for some key goods such as food and gas have moderated.  That's obviously welcome news, except that the report goes on to say But near-term inflation expectations have barely changed, a fact that the Bank attributes to high expectations for inflation in services such as rents. As long as the economy keeps puttering along without slipping into recession, the Bank will likely prefer to hold off on rate cuts for much of this year.