Canada’s Annual Inflation Hits 3.4% in December

Canada's Annual Inflation

Canada’s annual inflation rate climbed to 3.4% in December, representing a notable increase from November’s 3.1%, according to Statistics Canada’s consumer price index report. The surge was attributed to a more significant drop in gasoline prices a year ago compared to the current month. While economists expected this rise due to a base year effect, the report indicates that the Bank of Canada is unlikely to rush into interest rate cuts.

Key Inflation Highlights and Factors

  • December’s inflation report showed that the last month of the year saw an annual inflation rate of 3.4%, primarily influenced by a sharper decline in gasoline prices from the previous year.
  • The rise in grocery prices matched the pace of November, standing at 4.7% higher than the same period a year ago.
  • The average annual inflation rate for 2023 was 3.9%, a decrease from the 40-year high of 6.8% recorded in 2022.
  • Price growth in 2023 decelerated in six out of eight components of the consumer price index compared to the previous year.
  • Core measures of inflation, crucial for the Bank of Canada to gauge underlying trends, did not ease in the last month.

Bank of Canada’s Stance and Economic Outlook

Economists interpret the December inflation report as an indication that the Bank of Canada is unlikely to rush into cutting interest rates. Leslie Preston, a managing director and senior economist at TD, emphasized that the data doesn’t signal an imminent rate cut, noting that achieving the target inflation rate of two percent remains challenging.

The Bank of Canada is expected to maintain its key interest rate at five percent during its upcoming announcement, with most economists believing that current interest rates are sufficiently high to curb inflation. However, the timing of potential rate cuts will be influenced by how rapidly inflation falls and the extent of economic softening in the coming year.

Tu Nguyen, an economist at RSM Canada, suggests that the Bank of Canada should consider a shift to cutting interest rates soon. Nguyen points out that housing is a primary driver of inflation, particularly due to housing shortages and mortgage interest payments, influenced by monetary policy.

As the central bank navigates the delicate balance between controlling inflation and supporting economic growth, close attention will be paid to core measures of inflation and broader economic indicators in the coming months.

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