Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation eased to 1.8% in December, remaining in line with the BoC’s inflation target. However, the deceleration is entirely the result of the temporary GST holiday put in place on December 14th. As such, excluding the effect of indirect tax, CPI rose by 0.1% m-o-m, pushing the y-o-y higher at 2.2%, still consistent with the BoC’s inflation target. The average of the Bank of Canada’s core inflation measures eased slightly to 2.45% and remained below 3% (the upper band of the inflation target) for the ninth consecutive month.
The breadth of inflationary pressures was mostly unchanged in December. The share of components of CPI rising by more than 5% was unchanged at 14% and the share of components increasing by more than 3% eased to 22.5% from 24%. Both measures are in line with their historical norm (see Fig 1.). The unchanged share of components rising by 5% could suggest some stickiness in inflation.
The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures increased in December but remained consistent with the inflation target. As such, we observe that the 3-month annualized changes in the main CPI components are below 3% (see Fig. 2), except for shelter (+4.4%), transportation (+12.6%), and recreation, education and reading (+6.5%), with the 3-month annualized changes in headline CPI at 2.8%.
However, the momentum of BoC’s core measures rose to 3.55% on average and remained above 3.0% for a second consecutive month (see Fig 2). This increase suggests some stickiness in the core measures and some slightly stronger price pressures in recent months despite the GST holiday. While it could prove temporary, it is likely to draw the attention of BoC.
Overall, nothing in today’s report could suggest the BoC would change course and stop its easing cycle. With inflation in line with the inflation target, it is unlikely to be the BoC’s main worry at this point. Nevertheless, the stickiness of the BoC core measures will require close monitoring. The BoC’s focus remains primarily on the downside risks to growth, from weaker consumer spending, lower population growth and the threat of US tariffs. As we wrote (see Searching for the terminal rate), lower population growth next year will be a major drag on the economy, pushing potential growth and the neutral rate lower. With this in mind, we expect the BoC to ease by 25bp at the January meeting and to bring its policy rate to 2.0% in 2025, implying a 125bp reduction over the course of the year, as long as inflation remains consistent with the BoC’s target.
In Alberta, inflation eased to 2.5% in November. An acceleration in transportation costs due to higher gasoline prices compared to last was the main source of upward pressures on inflation. Shelter costs decelerated to 4.6% y-o-y, contributing 1.3pp due to rent and ownership costs. Food price inflation decelerated sharply to 1.7% y-o-y thanks to the tax holiday. Inflation excluding food and energy (a core inflation measure) eased to 2.6% from 3.0%, remaining above the national measure and one of the highest amongst the provinces.
The Consumer Price Index (CPI) was decreased 0.4% m-o-m non-seasonally-adjusted in December and the inflation rate eased to 1.8%. This was in line with expectations. The CPI index was pushed lower in December by the temporary GST holiday on food, alcohol, books, clothing and others that was introduced on December 14th. As a result, food prices declined by 1.8% m-o-m, clothing and footwear by 3.0% y-o-y, alcohol, tobacco and cannabis by 2.4%, and recreation, education and reading by 0.7%.
Excluding the impact of the change in indirect tax, CPI was up 0.1% m-o-m in December and 2.2% y-o-y, compared to 1.7% y-o-y in November.
On a year-on-year basis, only three of the eight major CPI components accelerated in December. Transportation costs accelerated to 2.3% y-o-y from 1.1%, mainly due to an increase in gasoline prices (+3.5% y-o-y). Recreation, education and reading also accelerated to 1.8% y-o-y from -0.9% y-o-y due to higher travel services costs.
Food price inflation decelerated to 0.6% y-o-y, its slowest since July 2017, as a result of the GST holiday and was the main source of slower inflation in December.
Shelter cost inflation eased to 4.5% from 4.6% and remained the main source of inflation, contributing 1.3pp to headline inflation, mainly due to higher rent (contributing 0.5pp) and mortgage interest costs (contributing 0.7pp).
Clothing and footwear prices were a drag on inflation (-4.5% y-o-y, reducing inflation by 0.2pp), as a result of the GST holiday on children’s clothes and continued sales on other items.
In December, goods price inflation eased 0.1%, while service price inflation was unchanged at 3.5%, its lowest since January 2022. Energy prices pushed inflation slightly higher, increasing by 1.0% y-o-y compared to the same month last year, after declining 1.4% y-o-y in November. Excluding food and energy, prices eased 0.1% m-o-m in December and increased by 2.1% compared to the same month last year. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, rose to 1.8%, still below the mid-point of the Bank of Canada’s operational target.
Looking at the BoC’s core measures of inflation, they were eased in December and remained below 3%. CPI-Trim was 2.5%, after 2.6% in November, while CPI-Median was 2.4% after 2.6% the prior month. As a result, the average of the two measures rose eased to 2.45%, below 3% for ninth consecutive month.
By provinces, headline inflation was the highest in BC (+2.6%), Alberta (+2.5%), Saskatchewan (+1.8%), and Ontario (+1.7% y-o-y), while it was the lowest in PEI (+0.4%), Newfoundland (+0.6%), Nova Scotia (+0.9%), and Manitoba (+1.1%).
Core inflation, or CPI excluding food and energy, with the highest in BC (+2.8%), Alberta (+2.4%), Saskatchewan (+1.9%), and Ontario (+1.8%). It was the lowest in Newfoundland (+0.5%), PEI (+0.6%), and Nova Scotia (+1.1%).
In Alberta, prices decreased 0.3% m-o-m and inflation eased to 2.5% in December, remaining amongst the highest at the provincial level. Six out of eight CPI components decelerated on the month. Shelter costs decelerated to 4.6% y-o-y from 5.6% y-o-y and remained the main source of inflation, contributing 1.3 percentage points to inflation. Rent costs decelerated to 6.8% y-o-y (contributing about 0.4pp to inflation) from 11.3% y-o-y and are no longer rising faster than in other provinces. Owned accommodation costs also decelerated slightly to 6.3% y-o-y (contributing 1.0pp to inflation) from 6.5% y-o-y.
Food prices inflation eased to 1.7% y-o-y from 3.1% y-o-y, as a result of the GST holiday.
Transportation costs accelerated to 4.7% compared to last year, as a result of higher gasoline prices (+14.4% y-o-y) due to a base effect. This component contributed 0.8pp to inflation.
Goods prices eased to 0.6% y-o-y from 0.8% y-o-y, while services prices inflation eased to 4.1% y-o-y from 4.6%. Inflation excluding food and energy declined to 2.6% from 3.0%, higher than the national measure. Energy costs rose 3.5% y-o-y compared to a 0.4% y-o-y decline in November.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.