Inflation: don’t be fooled by the headlines

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

Bottom line

Inflation was steady at 3.1% in November, higher than expectations. The unchanged inflation rate is mainly the result of a smaller drag from gasoline prices and higher travel service costs, compensating for lower food prices. Similarly, most measures of underlying inflationary pressures were either unchanged or rose slightly in November.

However, looking beyond the headlines, inflationary pressures have narrowed, with 32% of the components of CPI rising at more than 5%, compared to 36% in October. Similarly, the share of components increasing by more than 3% eased to 49% from 56% (see Fig 1.). It is the first time since October 2021 that more than 50% of the CPI basket is increasing at less than 3%. The improvement in these measures suggests broad-based deceleration in inflation, something that will be welcomed by the BoC.

The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures eased further in November and is consistent with the BoC target. As such, we observe that many of the 3-month annualized changes in some key CPI components are below 3%, except for shelter and recreation, education and reading, suggesting further deceleration (see Fig. 2). The 3-month annualized changes in headline CPI is now at 1.5%, after 3.1% in October. Similarly, the same measure for the BoC’s core measures increased by 2.45% on average, below 3% for a second consecutive month. CPI excluding food and energy is at 4.1%, above the BoC’s target range, while it is 2.1% for the BoC’s old measure of core (CPI ex the 8 most volatile components and indirect taxes).

The slower inflation momentum, as measured by the 3-month annualized changes, suggests that the unchanged y-o-y measures is the result of some base effect. The continued easing in inflation momentum, with most measures for core inflation around 2.5%, will provide some comfort to the BoC that inflation is gradually returning to its target. However, some base effects in the coming months are likely to push inflation higher, both headline and core measures, to around 3.5% over the next few months. As such, the momentum measures will remain key to assessing inflationary pressures.

Unchanged headline inflation and core inflation and the expected rise due to base effects in the coming months will provide reasons for the BoC to remain cautious on inflation. As such, we believe it may still be too early for the BoC to officially declare victory. Looking ahead, the BoC is unlikely to contemplate rate cuts until inflation has been brought sustainably below 3%. This is unlikely to happen until the Spring.

In Alberta, inflation accelerated to 2.5% in November. The acceleration was mainly due to less drag from transportation costs. Shelter costs decelerated slightly bu are contributing 2.2pp percentage points to inflation, as lower utilities costs fully offset higher rent and owned accommodation costs. Food prices also decelerated and remained one of the main sources of inflation, adding 0.8pp to headline inflation. Inflation excluding food and energy (a measure of core inflation) rose to 2.5% and remained below the national measure.

The Consumer Price Index (CPI) increased by 0.1% m-o-m non-seasonally-adjusted in November and the inflation rate was unchanged at 3.1. This was higher than expectations. Prices increased on the month in five of the eight major CPI components, led by clothing and footwear (+0.7% m-o-m), and food (+0.6% m-o-m), as vegetables increased 5.8% m-o-m. Shelter cost were also higher(+0.5% m-o-m), due to continued increases in rents (+1.4% m-o-m) and mortgage interest costs (+2.5% m-o-m). The biggest declines on the month were in transportation (-0.6% m-o-m), due to lower gasoline prices (-3.5% m-o-m). There were also lower prices in recreation, education and reading (-0.4% m-o-m), due to lower travel service costs (-1.4% m-o-m), and in household operations, furnishings and furniture (-0.3% m-o-m), as a result of lower communication costs (-2.5% m-o-m).

Five of the eight major CPI components decelerated in November on a year-on-year basis. Food price inflation eased to 5.0%, its lowest since November 2021, but remains an important source of inflation, contributing 0.8 percentage points (pp). Transportation costs were 0.1% lower than last year, thanks to a 7.7% y-o-y decline in gasoline prices, reducing inflation by 0.1pp. Household operations, furnishing and equipment costs declined -1.3% y-o-y, thanks to communication and child care costs, and reducing inflation by 0.2pp.

Shelter costs inflation decelerated to 5.9% y-o-y and is the main source of inflation, contributing 1.7 percentage points (pp), with about 1.13pp attributable to higher mortgage interest costs and 0.5pp due to higher rent. Recreation, education and reading inflation rose to 3.9% y-o-y, contributing 0.4pp to headline inflation due to an increase in travel services (+15.0% y-o-y) and digital media (+33.9% y-o-y).

In November, goods prices inflation eased to 1.4% from 1.6%, mainly due to lower gasoline prices, while services inflation was unchanged at 4.6%. Energy prices declined 1.9% y-o-y compared to the same month last year. Excluding food and energy, prices rose 0.2% on the month and increased by 3.5% 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, edged higher to 2.8%, below the upper band of the Bank of Canada’s operational target.

Looking at the BoC’s core measures of inflation, all indicators remained steady in November. CPI-Trim was unchanged at 3.5% and CPI-Median at 3.4%. As a result, the average of the two measures stayed at 3.45%.

In Alberta, inflation rose to 2.5% from 2.1% in November. Transportation cost was the main source of inflation acceleration, by declining by less than in the previous month, due to a smaller decline in gasoline prices (-11.3% y-o-y) in November compared to October. Nevertheless, transporation costs reduced inflation by 0.3pp in November (-0.6pp in October). Household operation, furnishing and equipment costs decelerated to -3.9% y-o-y, resulting from lower communication and child care costs, lowering inflation by 0.6pp.

Shelter costs accelerated to +8.5000.% y-o-y and remained the main source of inflation, contributing 2.2pp to inflation. Higher electricity prices, owned accommodation costs, and rent compared to last year are this category’s main sources of inflation. Food prices eased to 4.6% y-o-y and remained an important source of inflation in the province, contributing 0.8pp.

Goods prices inflation rose to 1.0% from 0.6%, while services prices accelerated to 3.9% from 3.6%. Inflation excluding food and energy edged higher to 2.5%, while energy costs declined 2.9% y-o-y.

 

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