BEYOND THE HEADLINES: December CPI Inflation Rate by Jordan Lee

Hello my friends :)

As we have all heard by now, Canada’s inflation rate has increased in the month of December to 3.4% from 3.1% in November 

Before we freak out, let’s take a deeper dive into what that really means…

WHAT CAUSED THE INCREASE?

• The headline inflation rate ticked up from 3.1% in November, largely because of a sharper decline in gasoline prices a year ago compared with last month. Economists were widely expecting this rise due to a base year effect, which refers to how price movement from a year ago affects the calculation of overall inflation.
• December’s report once again shows shelter inflation as the largest upside contributor to the year-over-year price gains, as past rate increases, a supply shortage and high immigration levels pushed up prices.
• Mortgage interest costs jumped 28.6 per cent and rent rose 7.7 per cent. Excluding shelter costs, the consumer price index rose 2.4 per cent from a year ago, versus 1.9 per cent in November.
• Housing affordability has also been another source of financial pain. Today's report finds the main contributor to inflation between December 2022 and December 2023 was mortgage interest costs, followed by rent.
• Shelter costs rose by six per cent compared to a year ago

HOW WILL THIS IMPACT FUTURE BoC INTEREST RATE ANNOUNCEMENTS?

• The next BoC interest rate announcement is January 24 where majority expect to keep the key policy rate on hold
• With the acceleration of core inflation, the Bank of Canada will still need to see downward trending progress before considering to lower rates
• The release of today’s data has prompted traders to push back bets on when the central bank will begin lowering rates from April to June
• “The pick-up in underlying inflation pressures raises the risk that the Bank of Canada will need to keep interest rates higher for longer than markets are now pricing in, with the economy suffering further as a result,” said Stephen Brown, an economist with Capital Economics, in a note to investors.
• The BoC had previously forecast inflation should hit its target by the end of 2025, but Governor Tiff Macklem - making his last public appearance of 2023 - told reporters it should be closer to the target by the end of this year

Bottom line: economists/markets currently project the start of the interest cuts to begin as early as April and as late as June (or even in the 2^nd half of the year), but they remain confident it will happen this year. It is anticipated that the BoC will drop the overnight rate by somewhere between 0.75%-1.50% in 2024

As always, please do not hesitate to reach out to me directly to chat about all things related as I am here to support you and your clients through this.

Best,