Canada’s consumer price index rose only 1.8 per cent in December and declined 0.4 per cent on a monthly basis thanks to the tax holiday and disinflation forces throughout the economy. These developments happened even with higher base effects and gasoline prices rising above their usual seasonal highs.
The full impact of the federal government’s GST/HST break will be felt in January since it only took effect midway through December. Despite the temporary nature of the tax holiday and the fact that only some savings are passed on to consumers, disinflation is still present in the data even before its introduction.
The Bank of Canada has a tricky job navigating the economic waters ahead. The jobs and inflation data paint a mixed picture—but disinflation seems to be the dominating trend, although certain components of the index such as shelter remain inflationary.
We expect the central bank to cut its policy rate by 25 basis points this month and slow the pace of rate cuts.
The next rate cut will mark yet another deviation from the U.S. Federal Reserve, but it might be necessary to maintain inflation near two per cent and boost growth. The Canadian dollar would continue to weaken in this scenario.
Trade policy uncertainty continues to cloud the inflation outlook. While price stability has essentially been restored, tariffs would be inflationary and could undo the progress made toward price stability in recent years. For now, the Bank of Canada will likely make rate decisions on a case-by-case basis.
Core inflation measures have also been well below the three per cent upper range and slowly inching closer to the two per cent target.
While December’s job report showed strong numbers, wage growth has dropped—which would cause service inflation to fall in the upcoming months. The decrease in wage growth will further add to disinflationary forces since service inflation was the persistent inflationary component in the consumer price index.
The tax holiday contributed to the drop in inflation as certain items such as food, restaurant dining, and children’s clothing and footwear were exempt from GST/HST.
Food inflation in particular fell to 0.6 per cent, down from 2.8 per cent in November. Groceries prices rose by 1.9 per cent—down from 2.6 per cent in November—and restaurant prices fell by a whopping 1.6 per cent on an annual basis. The difference is because some food items in grocery stores were already tax exempt, while restaurant dining was entirely subject to GST/HST before the tax break.
With food inflation temporarily abated, shelter remains the thorny component; it rose 4.5 per cent on a year-over-year basis following a 4.6 per cent increase in November.
Both rent prices and the mortgage interest cost index decelerated. Outright rents fell across major cities in Canada as demand waned because of stricter immigration and the influx of condominiums coming onto the market.
Gasoline prices rose 3.5 per cent because of base year effects as gasoline prices decreased sharply in December 2023 because of high oil supply and uncertain demand.
The year in review
On an annual average basis, the CPI rose 2.4 per cent—higher than the pre-pandemic years but the lowest since 2020.
While prices for food declined to 0.3 per cent, which is below pre-pandemic levels, services inflation persisted because of higher labour costs. The decrease of wage growth in December signals that the impact of a cooling job market has spread to wages, and services inflation is expected to ease in the months ahead.
High interest rates played a critical role in driving inflation as mortgage payments made up a major part of the CPI. Excluding mortgage payments, inflation fell below two per cent for the latter half of the year.
But rate cuts in the latter half of the year helped mitigate mortgage payments. The mortgage interest cost index rose 20.1 per cent last year compared with 28.5 per cent in 2023 as mortgages were initiated or renewed at lower rates.
Rent prices rose 8.2 per cent in 2023 because of higher demand caused by population growth from immigration and people who were deterred by high borrowing rates choosing to rent instead of buy. Decreasing interest rates will drive demand for sales this year, easing demand for rentals. Slower population growth because of stricter immigration rules will add more to the easing demand at least for the first half of this year.
Prices of transportation rose at a faster rate last year, by 1.6 per cent, compared with 2023 at 0.9 per cent as gasoline prices fell more slowly and insurance premiums and registration fees both went up.
