Canada CPI Preview: Forecasts from five major banks, inflation likely ticked up in December

We look for headline CPI inflation to firm by 0.2pp to 3.3% YoY in December as base effects from 2022 more than offset a 0.4% decline on the month. Our forecast would also see core inflation rates ease further with a 0.1-0.2pp decline for CPI-trim/median, leaving the average at 3.3% YoY, even as these measures firm on a 3m annualized basis. Even with headline CPI printing slightly below Bank of Canada projections for Q4, we believe the Bank still needs to see additional evidence of cooling inflation pressures before it drops the threat of further hikes.

Canadian headline CPI growth is expected to tick slightly higher (+3.4% YoY) from November’s 3.1% increase, but with the gain largely coming from energy price ‘base-effects’ as a large drop in gasoline prices a year ago falls out of the YoY growth calculation. YoY growth in the BoC’s preferred median and trim ‘core’ CPI measures should be little changed in December, and the more recent three-month annualized growth rate that the central bank has been watching is more likely to tick a touch higher (from 2.3% and 2.6%, respectively, growth rates in November.)  Still, the breadth and magnitude of inflation have continued to edge lower on balance. Growth in mortgage interest costs is accounting for roughly a third of total price growth excluding food and energy products. The BoC will continue to look through price growth from that component because the increase is a direct result of earlier interest rate hikes, and price increases excluding that component have been running within the 1% to 3% inflation target range.

The drop in gasoline prices may translate into a -0.3% for the headline index before seasonal adjustment. Despite this drop, the 12-month rate could still go up from 3.1% to 3.4%, reflecting a highly negative base effect. Contrary to the headline print, the core measures preferred by the BoC should ease, with CPI-med likely moving from 3.4% to 3.3% and CPI-trim from 3.5% to 3.4%.

We expect a 0.2% MoM decline in CPI in December as prices typically fall on a non-seasonally adjusted basis at the end of the year. This would include declines in energy prices. Services prices, however, should be mixed. But the most important element of monthly CPI reports will be the core inflation measures. There should be further declines in annual readings over the coming months in line with trends in survey data such as the CFIB’s price plans. But the 3-month pace will be most important for BoC policy as BoC officials will need to see at least 3-4 months of 3-month core inflation trending around 2.5% to feel comfortable cutting rates. 3-month core inflation was at 2.5% in November data, but ‘base effects’ would suggest upward risks in December. An uptick in 3-month core inflation could push back market pricing for a full rate cut by the BoC by April (there will only be two more CPI reports before the April meeting after this release).

The annual rate of inflation likely accelerated modestly in December, albeit largely because gasoline prices fell less than they did during the same month of 2022. Elsewhere, rents and mortgage interest costs will keep shelter prices rising quickly, although there should be further signs that food price inflation is easing. Airline fares weren’t as weak as normal in November, which could mean that they didn’t rise as much as they typically do in December. With overall inflationary pressures becoming less broad-based, we should see a further deceleration in the Bank of Canada’s preferred CPI-trim and CPI-median measures of inflation.