This week’s inflation “setback” was not great news for anyone hoping for a Bank of Canada rate cut sooner rather than later.

The consumer price index actually picked up in December to 3.4 per cent, an apparent blow to the central banks’ efforts to put a lid on rising prices.

The rise in the headline pace was expected, but what caught economists’ attention was the increase in measures that filter out volatility. CPI trim and median core rates, which the Bank of Canada prefers, both rose more than expected.

“If you are looking for data to signal a rate cut is imminent, this isn’t it,” wrote Leslie Preston, managing director at TD Economics, in a note.

“December’s inflation report underscores that the last mile of getting inflation all the way back to 2 per cent is the hardest.”

The data pushed back market bets on the timing of the Bank’s first cut from April to June. This was the last inflation reading before the central bank makes its decision on Wednesday when it is expected to hold its benchmark interest rate at 5 per cent.

Some economists, however, including TD, are still holding out for an earlier cut, believing the economy will have cooled enough by the early spring, even if inflation isn’t quite at target.

“As Governor Macklem pointed out in December, the BoC doesn’t need to see 2 per cent to begin normalizing monetary policy, but rather be confident it is getting there,” said Preston.

Tu Nguyen, an economist with RSM Canada, also sees the Bank reducing rates as early as April.

“Given that the economy has slowed to a crawl and that inflation at this point is mostly driven by shelter, keeping the rates higher for longer will not help,” he said.

After the inflation data came out, Capital Economics pushed back its call, but from March to April.

“With the economy looking weak, we continue to think that the first rate cut is coming sooner rather than later,” said Stephen Brown, Capital’s deputy chief North America economist.

Despite the sticky inflation reading, he expects the Bank to cut its economic forecast Wednesday and likely its CPI forecast as well.

Attacks in the Red Sea may cause concern, but Capital believes the rise in shipping costs is unlikely to “move the needle for inflation.”

Oil prices also have fallen to US$72 since the Bank’s last monetary policy report pegged them at US$85, he said.

December’s inflation report showed that shelter costs were the biggest contributor to price gains. Mortgage interest costs were up 28.6 per cent and rent 7.7 per cent.

“Without rent and mortgage costs, core inflation is already near the pre-pandemic norm,” said Brown.

Bank of Canada policy is responsible for higher mortgage costs and there is little it can do about rising rents, which are mostly driven by the surge in immigration, he said.

“All this puts the Bank in a tricky position,” said Brown. “It can either accept that rent inflation will be higher than before the pandemic, or it can keep interest rates high for long enough to create a deeper economic downturn and drive non-housing inflation even lower.”

The problem with the second option is that it has the potential to make the housing shortage even worse. Higher interest rates are already holding back housing starts in Toronto, a city that attracts a large share of immigrants.

Brown expects the Bank will change its tune to focus on the weak economy and slowing inflation soon,  but Wednesday might be a bit early to look for such a change.

“We still expect 200 bp of cuts in total in the loosening cycle to eventually take the policy rate to 3 per cent, although that level is now reached in early 2025 rather than late 2024,” said Brown.

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Housing starts on single-family homes in 2023 were among the lowest in records going back 70 years, while apartment starts reached a record high, says BMO economist Shelly Kaushik in today’s chart.

Kaushik said government legislation has pushed developers towards higher density since the mid-2000s and the growing population and smaller household size have increased demand for smaller spaces. The high cost of houses is probably also a factor.

But Canadians’ desire for larger, more remote dwellings — a holdover from the pandemic — along with millennials coming into their prime home-buying years will continue to support demand for single-family homes even when supply is limited, she said.

• Today is the deadline for Canadian businesses to repay pandemic loans and receive partial forgiveness. Business groups say Ottawa’s failure to extend the deadline will mean thousands of struggling companies will have to close.
• Natural Resources Minister Jonathan Wilkinson will make a keynote address followed by a fireside chat at the BC Natural Resources Forum in Prince George, B.C.
• Today’s Data: U.S. jobless claims, U.S. building permits
• Earnings: First Bancorp, Resolute Forest Products

Get all of today’s top breaking stories as they happen with the Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.

• The CRA’s prescribed interest rate hits double digits: 3 ways it could affect your wallet
  
• That cash you have stashed away is about to earn lower and lower returns

The stock market had a great 2023 and a decent-enough start this year, but there are still plenty of pundits calling for a crash. To combat the doomscrolling, veteran investor and eternal optimist Peter Hodson dives into history to highlight times when markets or individual stocks really soared. Find out more at FP Investing 

Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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