Consumer price inflation ticked up to 4.8% year-on-year (y/y) in December, in line with market expectations. Energy prices slowed to 21.2% (from 26.4% in November), but excluding energy, prices picked up noticeably, to 3.8% (from 3.3 in November).
Food price growth accelerated again, hitting 5.2% y/y (from 4.4% in November). Shelter prices also eclipsed the 5% mark, hitting 5.4% (from 4.8%) as insurance costs accelerated. Clothing price inflation continued to bounce back, increasing to 1.1% (from 0.7%). Recreation, reading & education, and tobacco & alcohol saw a slower rate of price growth in December.
Seasonally adjusted, month-on-month prices were up 0.3%, in line with price growth in November. Prices gains were led by shelter (+0.5%), food (+0.4%), and household operations and furnishings (+0.2%). Clothing and footwear (-0.7%) and transportation prices (-0.3%) fell in December, while the remaining categories were flat on the month.
All three of the Bank of Canada’s core inflation metrics picked up in December. CPI-trim remained rose to 3.7% (from 3.4%), CPI-median to 3.0% (from 2.8%), and CPI-common measure to 2.1% (from 2.0%).
Key Implications
As it is everywhere, inflation remains hot in Canada. Many of the sources of upward pressure on prices in Canada are global, reflecting the mismatch between strong demand for goods and the hobbled ability of the global economy to supply them.
The one exception to the global nature of the current inflationary environment, is housing inflation, which is both domestically driven and, outside of increased incidents of extreme weather driving up insurance prices, directly related to the Bank of Canada’s policy stance. There are good reasons beyond its direct impact on consumer price inflation to pay attention to a frothy housing market. High household debt adds financial vulnerabilities that that may challenge the future ability of monetary policy to maintain price stability.
Given the strength in the labour market and the challenges faced by employers in filling positions, the economy is operating at or near its productive potential. As noted in the Bank of Canada’s Business Outlook Survey, these are increasingly becoming imbedded in expectations. Inflation is likely to come down over the next year, but getting it there will require tighter financial conditions and rate hikes by the Bank of Canada. The process is likely to begin this year but bringing inflation back to 2% is likely to be a multiyear project.
