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

Bottom line

Inflation re-accelerated in December and reached a level not seen since the early 1990s. The high level of inflation continues to be mainly due to a handful of components: gasoline prices, food prices, homeowners’ costs, utilities cost and motor vehicle prices. Altogether, these five items are responsible for about 4.0 percentage points of the 4.8% inflation rate.

Additionally, 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 these 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 third consecutive month. However, the increase in all the core measures of inflation suggests a broadening in inflationary pressures.

With inflation above its target of 2% and more persistent than initially thought, inflation expectations rising and a broadening of inflationary pressure, we believe the Bank of Canada will raise rates sooner rather than later; there is a risk this increase could come at the January meeting. However, two factors are likely to hold back the BoC from raising rates next week:

  1.  the uncertainty to the near-term outlook caused by the Omicron wave and the possible decline in economic activity associated with it, and
  2. raising in January would go against the current forward guidance, with the BoC signalling it considers it will need to increase rates in the middle quarter of 2022.

With these points in mind, we believe the BoC will keep its policy rate unchanged at next week’s meeting but will modify its forward-guidance to say that a rate hike is imminent. As a result, we bring forward the timing of the first rate hike to the March meeting.

In Alberta, inflation jumped higher. 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. We also note that core inflation for the province accelerated sharply in December but remains lower than in the rest of the country and in line with the BoC’s target.

The Consumer Price Index (CPI) decreased by 0.1% month-on-month non-seasonally-adjusted in December. The inflation rate remained stable at 4.7%, its highest level since 2003. Prices rose on the month in only two of the eight major CPI components, food (+0.6% month-on-month), and shelter (+0.6% month-on-month). On the flip side, clothing and footwear (-3.9% month-on-month), recreation, education and reading (-0.7% month-on-month), health and personal care (-0.5% month-on-month) and alcohol and tobacco (-0.5% month-on-month) costs declined on the month. The decrease in clothing and footwear prices was responsible for almost all of the monthly decline in headline CPI. After being a big driver to rising inflation, Gasoline prices dropped 4.1% month-on-month. Shelter costs continued to increase and were the main positive contributor to the change in CPI on the month, pushed higher by owned accommodation cost, more specifically homeowner’s insurance.

Four of the eight major CPI components accelerated in December on a year-on-year basis, led by food prices and shelter cost. Shelter costs (+5.5% year-on-year, the highest since 2001), especially owned accommodation cost, are the primary source of inflation, contributing 1.6 percentage points (pp) to inflation. Food prices inflation, which reached its highest since 2009 at 5.2%, contributed 0.9pp to inflation. Transportation cost, another major contributor to inflation (+1.4pp), moderated on the months thanks to lower gasoline prices. However, the cost of passenger vehicles continued to increase due to shortages.

Goods prices inflation moderated to 6.8% in December from 6.9%, while services inflation accelerated to 3.1% from 3.4%. Energy prices have decelerated, increasing by 21.2% since December of last year. Excluding food and energy, prices were inched lower slightly on the month and increased by 3.4% compared to the same month the previous year, the fastest since 2002. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, edged increase to its highest level since 1989.

Looking at the BoC’s core measures of inflation, they all accelerated in December. CPI-Trim rose to 3.7% form 3.3%, CPI-Median to 3.0% from 2.8% and CPI-Common to 2.1% from 2.0%. The average of the core measures increased to 2.9%, its highest since 1991.

In Alberta, inflation jumped higher to 4.8% in December. 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 (+1.3pp), mainly due to rising utilities cost, especially electricity and natural gas prices. Food prices are also an important source of inflation, contributing +0.9pp. Goods price inflation accelerated to 8.2% and services price inflation rose to 1.8%. Inflation excluding food and energy surged to 2.3. Energy cost have increased 37% 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.