While today’s inflation report suggests the Bank of Canada has “hiked enough,” it also suggests inflation is still running too hot for rates to come down in the near term. .

The headline inflation rate in Canada rose to 3.4% in December from November’s reading of 3.1%. The increase was largely expected and came against a backdrop of a stalled national economy, rising unemployment, stretched household budgets, and a central bank focused on bringing inflation down to 2% rather than letting it hover at the upper end of the inflation-control target range.

A large portion of the increase is the result of a “base-year effect” linked to volatile gasoline prices. When gasoline is excluded, inflation ticked down slightly from 3.6% in November to 3.5% in December—still well-above the 2% target.

The price of food purchased from stores increased by 4.7% on a year-over-year (y/y) basis, unchanged from November. Mortgage interest costs remained much more expensive than 12 months earlier at +28.6% y/y.

Two of the three measures of core inflation remained unchanged at +3.9% y/y for CPI-common and +3.6% for CPI-median. The CPI-trim measure rose by 0.2 percentage points to +3.7%.

With all 12 months of data in hand, the annual inflation rate in Canada came in at 3.9% in 2023. This is down from 6.8% in 2022 but, as with the y/y reading for December, is running much hotter than the Bank of Canada (and consumers) want to see.

The main takeaway vis-à-vis the Bank of Canada’s future interest rate decisions is that, despite having come down from the highs reached in 2022 and notwithstanding the noise created by base-year effects, headline inflation is still too high for the Bank of Canada to jump the gun on interest rate cuts.

In Alberta, headline inflation went from 2.5% in November to 3.0% in December. Alberta was not alone in this regard, with the inflation rate rising in nine provinces.

Released yesterday, the Bank of Canada’s latest Canadian Survey of Consumer Expectations shows that the short-term  inflation expectations of Canadian consumers have come down from the highs reached in 2022, but barely budged compared to the previous survey and remain above pre-pandemic levels. At 3.9%, the expectation for inflation over the next two years is almost double the Bank of Canada’s inflation target of 2%.

Like today’s CPI reading, these results are unlikely to change the Bank of Canada’s decision to hold off on more interest rate hikes, but it does reinforce our call that rate cuts won’t begin until June.

Answer to the previous trivia question: According to Statistics Canada, the highest annual average increase in the Canadian Consumer Price Index was recorded in 1917 (+17.9%).

Today’s trivia question: Statistics Canada is the official tracker of consumer inflation in Canada. What agency plays this role in the United States?