Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation eased to 1.9% in November, remaining in line with the BoC’s inflation target. The slightly slower pace of inflation was mainly the result of a deceleration in clothing and footwear costs, thanks to Black Friday deals, lower communication costs and smaller increase in mortgage interest costs. However, higher transportation costs, mainly due to a smaller decline in gasoline prices compared to last year, were the main source of upside pressures on inflation. The average of the Bank of Canada’s core inflation measures was unchanged from an upwardly revised level of 2.65% and remained below 3% (the upper band of the inflation target) for the ninth consecutive month.
The breadth of inflationary pressures narrowed very slightly in November. 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 24% from 27%. 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 November 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 food prices (+4.4%), with the 3-month annualized changes in headline CPI at 1.8%. The recent acceleration in food prices could be due to the weaker Canadian dollar at a period when grocers are changing from local suppliers to imported produce.
However, the momentum of BoC’s core measures rose to 3.3% on average and broke above 3.0% for the first time since January 2024 (see Fig 2). This increase suggests some stickiness in the core measures and some slightly stronger price pressures in recent months. While it could prove temporary,
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. 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 2.8% in November. An acceleration in transportation costs due to higher gasoline prices compared to last was the main source of upward pressures on inflation. In addition, shelter costs were unchanged at 5.6% y-o-y, contributing 1.5pp to higher rent. Food price inflation decelerated but remained one of the main sources of inflation, adding 0.5pp to headline inflation. Inflation excluding food and energy (a core inflation measure) rose to 3.0%, remaining above the national measure and the highest amongst the provinces.
The Consumer Price Index (CPI) was unchanged on non-seasonally-adjusted in November and the inflation rate decelerated to 1.9%. This was in line with our expectations. The CPI index was pushed higher in November by higher food prices (+0.5% m-o-m) and shelter (+0.1% m-o-m), with lower prices of clothing and footwear (-0.8% m-o-m), due to Black Friday rebates, and in household operations (-0.9% m-o-m) offset fully the higher prices elsewhere.
On a year-on-year basis, only one of the eight major CPI components accelerated in November. Transportation costs accelerated to 1.1% y-o-y from 0.2%, mainly due to less drag from gasoline prices (-0.5% y-o-y).
Shelter cost inflation eased to 4.6% from 4.8% and remained the main source of inflation, contributing 1.3pp to headline inflation, mainly due to higher rent (contributing 0.6pp) and mortgage interest costs (contributing 0.7pp).
Food price inflation decelerated slightly to 2.9% y-o-y, contributing 0.5pp to inflation. This was mainly the result of continued increases in food purchased from stores (+2.6% y-o-y) and higher restaurant costs (+3.4% y-o-y)
Household operations costs were a drag on inflation (-0.7% y-o-y, reducing inflation by 0.1pp). This was mainly due to lower communication costs (-6.2% y-o-y).
In November, goods price inflation was flat at 0.0%, while service price inflation eased to 3.5% from 3.6%, its lowest since January 2022. Energy prices were a smaller drag on inflation, declining by 1.4% y-o-y compared to the same month last year, after declining 3.5% y-o-y in October. Excluding food and energy, prices eased 0.1% m-o-m in November and increased by 1.9% 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, eased to 1.6%, below the mid-point of the Bank of Canada’s operational target.
Looking at the BoC’s core measures of inflation, they were unchanged in Novemebr, but remained below 3%. CPI-Trim was 2.6% while CPI-Median was 2.5% from 2.3%. As a result, the average of the two measures rose remained at 2.65%, below 3% for eight consecutive months.
In Alberta, prices increased 0.1% m-o-m and inflation eased to 2.8% in October, the highest of all provinces. Only four out of eight CPI components decelerated on the month. Shelter costs were unchanged, increasing 5.6% y-o-y and remained the main source of inflation, contributing 1.5 percentage points to inflation. Rent costs accelerated slightly to 11.3% y-o-y (contributing about 0.7pp to inflation) and continue to rise faster than in any other province. On the flip side, owned accommodation costs decelerated to 6.5% y-o-y (contributing 1.0pp to inflation). Moreover, a smaller decline in utility costs compared to last year meant that this component was less of a drag on inflation in November.
Transportation costs accelerated to 2.5% compared to last year, as a result of higher gasoline prices (+6.9% y-o-y).
Goods prices eased to 0.8% y-o-y from 1.2% y-o-y, while services prices inflation rose to 4.6% y-o-y from 4.5%. Inflation excluding food and energy declined to 3.0% from 3.3, higher than the national measure and the highest of all provinces. Energy costs eased less than in the previous month, -0.4% y-o-y in November compared to -2.5% y-o-y in October.