Get ready for another rate hike: What economists are saying about the inflation numbers
The good news is that the pace of rising prices is easing
Canada’s annual inflation rate slowed in December to 6.3 per cent, offering “encouraging signs” to some economists that the Bank of Canada could soon call it a day on rate hikes. But not just yet.
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Inflation peaked in the summer at 8.1 per cent and has been slowly decelerating since. In November, the annual inflation rate was 6.8 per cent.
The slowing in December was mainly due to falling gas prices, which were down 13 per cent from November.
Food price increases slowed as well, but they remain elevated, said Benjamin Reitzes of BMO Economics in a note to clients. Prices were up 10.1 per cent year over year in December, “just a couple of ticks off the highs.” In November, food prices were up 10.3 per cent.
Inflation, including the Bank of Canada’s preferred core measures, still remains well above the comfort zone of 1 to 3 per cent.
And this data will be important when the central bank meets to decide its next interest rate move on Jan. 25.
Here’s what economists say about the latest inflation reading and the Bank’s coming decision.
Nathan Janzen, RBC Economics
“One last 25 basis point hike to the overnight rate still looks likely at next week’s BoC policy decision, but we continue to expect the end of the current hiking cycle is near. Inflation pressures are still running above the BoC’s target range, but have shown persistent signs of slowing. Global inflation pressures have slowed as commodity prices declined and supply chain disruptions eased. Persistently low unemployment is pushing wages higher and threatening to put a floor under future inflation rates. But softer labour markets in 2023 are likely already baked in as the aggressive interest rate hikes from 2022 filter through to household and business purchasing power/decisions with a lag.”
Benjamin Reitzes, BMO Economics
Headline inflation was soft, as widely expected, due to seasonality and a big drop in gasoline prices. Core inflation eased ever-so-slightly, but the slow pace of improvement will bring little comfort to policy-makers. Underlying price pressures remain sticky for now. While the direction of inflation is at least mildly encouraging, there’s nothing in this report to keep the Bank of Canada from hiking rates another 25 basis points at next week’s policy meeting.
Stephen Brown, Capital Economics
CPI-trim and CPI-median edged down by 0.1 percentage points each, although 0.1 percentage point upward revisions in the prior month left them at 5.3 per cent and 5.0 per cent, respectively. Based on our original calculations on the pre-revision data, those moves seem to imply that core prices rose by just 0.1 per cent month over month – an annualized pace below the two per cent inflation target – but we will confirm in the Data Response that follows. Either way, the December data confirm that overall inflation pressures are easing and support our forecast that a 25 basis-point hike next week will mark the end of the Bank’s tightening cycle.
Karyne Charbonneau, CIBC Economics
The good news is that inflation is easing, and that will become more noticeable when the big monthly increases seen this past spring start to drop out of the annual calculation this year. Moreover, core inflation excluding mortgage costs is growing at a pace much closer to target. However, given the strong December job’s report and tightness in the labour market, that likely won’t be enough to deter the Bank of Canada from raising rates 25 bps one last time next week.
Michael Greenberg, Franklin Templeton Investment Solutions
Gas prices dominated the headline inflation number today leading to a large drop in the headline index. Some of the alternative core measures the Bank of Canada is focused on also fell from upwardly revised November numbers but remain sticky. This leads to some uncertainty on the “to hike or not to hike” dilemma that the Bank of Canada has. Economic data has been a bit mixed, strong jobs data and sticky core inflation components suggest a hike, while a weaker Business Outlook Survey and falling headline inflation suggest a pause. Our view is the Bank of Canada might be a little more stubborn to ensure that inflation gets back to the one to three per cent target, and more importantly that inflation expectations from consumers and business remain anchored. We expect a 25-basis-point hike this month but that the BoC will remain on hold for longer than the market expects.
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