Highlights:
- Headline CPI inflation eased to 1.9% from 2.1% in November but due almost entirely to a large monthly drop in energy prices.
- Excluding food & energy, year-over-year price growth dipped to 1.7% from 1.8% in November.
- The Bank of Canada’s preferred ‘core’ measures ticked higher, on balance. Both the ‘median’ and ‘trim’ measures at 1.9% are essentially in line with the Bank of Canada’s 2% inflation target.
Headline CPI growth matched expectations, rising 1.9% from a year ago in December. That was down from 2.1% in November, but almost entirely because of a monthly drop in the volatile energy component. Food price growth continued to tick higher with the year-over-year rate rising to 2.0% in December. Excluding the food & energy components, price growth eased to 1.7% from 1.8% in November but that was still well-above a recent low of 1.2% in September. The Bank of Canada’s preferred measures of core inflation ticked higher on balance. Both the CPI-trim and CPI-median measures at 1.9% are effectively right in line with the Bank of Canada’s 2% inflation target. The CPI-common is still lower, at 1.6%, but up from 1.5% in November.
Weakness in consumer demand never seemed likely to be behind the absence of more significant inflation pressures last year given rising household spending and debt levels. The firming in underlying price pressures in recent months alongside better wage growth numbers nonetheless should further reassure the Bank of Canada that the economy is indeed now at least close to bumping up against long-run capacity limits. Risks to the outlook remain, particularly around NAFTA renegotiations, but we expect the stronger economy will ultimately warrant further gradual interest rate hikes from the central bank this year.
