Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud

Bottom line

Inflation stabilized somewhat in November. The high level of inflation continues to be mainly due to a handful of components: gasoline prices, food prices, homeowners’ costs, and utilities. Altogether, these four items are responsible for about 3.7 percentage points of the 4.7% inflation rate.

Nevertheless, the recent trend in the CPI monthly changes suggests that inflationary pressures remain elevated. As such, the 3-month annualized change in most of the CPI components remains above 2% and above their year-on-year changes (see fig. 1). Some of those pressures are due to supply constraints resulting from the pandemic, a surge in shipping costs and the broad-based increase in commodity prices, especially energy.

We note, however, that the 3-month annualized change in CPI, excluding food and energy, and in the Bank of Canada’s old measure of core inflation, are no longer above their year-on-year changes for a second consecutive month. This suggests some further moderation in those measures of underlying inflation, albeit remaining at a high level.

With inflation above its target of 2% and likely to be more persistent than initially thought, we believe the Bank of Canada will increase its policy rate at the April 2022 meeting. Nevertheless, as we have shown previously (see Pep talk for Central Bankers and Supply-induced inflation), given the nature of the inflationary pressures (supply rather demand), the central bank faces a trade-off between fighting inflation and risking stalling the recovery or tolerating higher inflation to allow further recovery in the labour market.

In Alberta, inflation was also unchanged, hitting its highest level in a decade. As is the case nationally, most of the inflation is due to higher energy costs (gasoline, electricity and natural gas), motor vehicles and food prices. As such, we note that core inflation for the province decelerated again in November and remains lower than in the rest of the country and below the Band of Canada’s 2% target.

The Consumer Price Index (CPI) increased by 0.2% month-on-month non-seasonally-adjusted in November. The inflation rate remained stable at 4.7%, its highest level since 2003. Prices rose on the month in six of the eight major CPI components, with food (+0.9% month-on-month) and clothing and footwear (+0.6% month-on-month) seeing the biggest monthly increases. On the flip side, recreation, education and reading costs declined on the month (-1.3% month-on-month). The increase in food prices was responsible for almost three-quarters of the monthly rise in headline CPI. After being a big driver to rising inflation, transportation costs were flat on the month. Shelter costs continued to increase and were the second biggest contributor to the monthly increase in CPI, pushed higher by owned accommodation cost and utilities, especially natural gas prices.

Four of the eight major CPI components accelerated in November on a year-on-year basis, led by food prices. Transportation costs (+10.0% year-on-year), especially gasoline, remain the primary source of inflation, contributing 1.6 percentage points (pp) to inflation. Higher shelter cost (+4.8% year-on-year) remained an important contributor to inflation (+1.5pp), with owned accommodation cost increasing by 5.3%. Food prices inflation, which reached its highest since 2015 at 4.4%, contributed 0.7pp to inflation.

Goods prices inflation accelerated to 6.9% in November from 6.5%, while services inflation moderated to 3.1% from 3.2%. Energy prices have increased by 26.4% since November of last year. Excluding food and energy, prices were unchanged on the month and increased by 3.1% compared to the same month the previous year. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, edged lower to 3.6%.

Looking at the Bank of Canada’s core measures of inflation, CPI-Trim and CPI-Median were unchanged at 3.4% and 2.8%, respectively. CPI-Common increased to 2.0% in November. The average of the core measures remained at 2.7%, its highest since 2008.

In Alberta, inflation was unchanged at 4.3% in November. Transportation costs remain the main contributor to inflation (+2.4pp), mainly due to increased gasoline prices and motor vehicle prices. Shelter costs are another important contributor to inflation (+1.1pp), mainly due to rising utilities cost, especially electricity and natural gas prices. Food prices are also an important source of inflation, contributing +0.7pp. Goods price inflation accelerated to 7.6%, while services price inflation moderated to 1.2%. Inflation excluding food and energy eased to 1.8%, its lowest level since July. Energy cost have increased 34% compared to the same month last year.

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.