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

Bottom line

Inflation accelerated 3.4% in December, in line with expectation expectations. The higher inflation rate is mainly the result of a base effect with gasoline prices no longer being a drag on inflation, as prices are now higher than last year. However, the Bank of Canada’s measures of core inflation were either unchanged or rose slightly in December and other measures suggest that inflation may be stickier.

However, inflationary pressures have broadened slightly, with 32.5% of the components of CPI rising at more than 5%, compared to 32% in October. Similarly, the share of components increasing by more than 3% rose to 52% from 49% (see Fig 1.). The rise in these measures suggests many CPI components accelerated in December, something that could suggest stickiness in the inflationary process.

The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures rose in December but remained consistent with the BoC target. As such, we observe that many of the 3-month annualized changes in some key CPI components rose in December but are below 3%, except for shelter (7.0%) and food (+3.7%) (see Fig. 2). The 3-month annualized changes in headline CPI is now at 2.3 %, after 1.5% in November. However, the same measure for various measures of core inflation rose on the month, with the BoC’s core measures increased by 3.6% on average and is back above 3%. CPI excluding food and energy is at 3.8%, above the BoC’s target range, while it is 2.6% for the BoC’s old measure of core (CPI ex the 8 most volatile components and indirect taxes). Momentum also increases in measures of inflation excluding mortgage interest costs but remains below 3%.

The faster inflation momentum, as measured by the 3-month annualized changes, suggests that the rise in the y-o-y measures is not only due to a base effect. This is also confirmed by the broader inflationary pressures in December and the faster momentum in the BoC’s measures of core inflation. With, some base effects in the coming months 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.

The increase in headline inflation, the relatively unchanged core inflation and the rise in core inflation’s momentum will provide reasons for the BoC to remain cautious on inflation. As such, we believe it remains too early for the BoC to officially declare victory on inflation. 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 and could be delayed if inflation proves to be stickier than expected.

In Alberta, inflation accelerated to 3.0% in December. The acceleration was mainly due to less drag from transportation costs. Shelter costs decelerated slightly but are contributing 2.0pp percentage points to inflation, as lower utilities costs fully offset higher rent and owned accommodation costs. Food prices accelerated and remained one of the main sources of inflation, adding 0.9pp to headline inflation. Inflation excluding food and energy (a measure of core inflation) rose to 3.0% and remained below the national measure.

The Consumer Price Index (CPI) decreased by 0.3% m-o-m non-seasonally-adjusted in December but the inflation rate rose to 3.4%. This was in line with expectations. Prices were lower on the month in five of the eight major CPI components, led by recreation, education and reading (-3.4% m-o-m), due to lower travel services costs. Price also declined in clothing and footwear (-2.2% m-o-m) and household operations, furnishings and furniture (-0.3% m-o-m), as a result of lower communication costs (-3.5% m-o-m). Transportation costs increased on the month (+0.6% m-o-m), decline a decline in gasoline prices (-4.4% m-o-m), due to a rise in intercity transportation costs (+26.5% m-o-m). Shelter costs increased 0.4% m-o-m, pushed higher by rents (+0.7% m-o-m) and mortgage interest costs (+1.8% m-o-m), while food prices rose 0.3% m-o-m.

Despite an acceleration in headline inflation, only three of the eight major CPI components accelerated in December on a year-on-year basis. Shelter costs inflation accelerated to 6.0% y-o-y and is the main source of inflation, contributing 1.7 percentage points (pp), with about 1.09pp attributable to higher mortgage interest costs and 0.5pp due to higher rent. Transportation costs accelerated to 3.2% y-o-y from -0.1% y-o-y in November, due to an increase in gasoline prices (+1.4% y-o-y) and higher passenger vehicle prices (+2.3% y-o-y). Food price inflation was unchanged at 5.0% and remains an important source of inflation, contributing 0.8 percentage points (pp).

Recreation, education and reading was the main source of drag on inflation, decelerating to 1.7% y-o-y, contributing 0.2pp to headline inflation due to a slower pace of increase in travel services (+1.2% y-o-y) and digital media (+11.8% y-o-y).

In December, goods price inflation rose to 2.4% from 1.4%, mainly due to higher gasoline prices, while services inflation eased to 4.3%. Energy prices are 0.4% lower compared to the same month last year, after declining 5.7% y-o-y in November. Excluding food and energy, prices declined 0.3% on the month and increased by 3.4% 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 eased to 2.6%, below the upper band of the Bank of Canada’s operational target.

Looking at the BoC’s core measures of inflation, they were either higher or unchanged. CPI-Trim rose to 3.7% from 3.6%, while CPI-Median remained steady at 3.6%. As a result, the average of the two measures rose to 3.65%.

In Alberta, inflation rose to 3.0% from 2.5% in December. Transportation cost was the main source of inflation acceleration, due to a rise in the price of passenger vehicles (+3.2% y-o-y) and less drag from gasoline prices (-3.2% y-o-y). As a result, transportation costs contributed 0.3pp to inflation in December (-0.6pp contribution in November).

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 decelerated to +7.7% y-o-y and remained the main source of inflation, contributing 2.0pp to inflation. Higher rent and owned accommodation costs, mainly mortgage interest costs, compared to last year are this category’s main sources of inflation. Food prices accelerated to 5.1% y-o-y and remained an important source of inflation in the province, contributing 0.9pp.

Goods prices inflation rose to 2.1% from 1.0%, while services prices inched lower to 3.8% from 3.9%. Inflation excluding food and energy edged higher to 3.0%, while energy costs declined 1.8% y-o-y.

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