Several measures of core inflation have raised eyebrows among financial analysts as the Bank of Canada considers when to lower interest rates. Rental prices have continued to rise, as grocery prices held steady and prices at restaurants have risen by 5.6 per cent over the past year. A server clears a table on a patio at a restaurant, in Vancouver, on April 2, 2021.DARRYL DYCK/The Canadian Press
An acceleration in certain closely watched measures of consumer price growth in December shows that inflation is proving sticky, a potential complication for the Bank of Canada as it considers when to lower interest rates.
The Consumer Price Index (CPI) rose at an annual pace of 3.4 per cent last month, up from 3.1 per cent in November, Statistics Canada said Tuesday in a report. This result was heavily influenced by what economists refer to as base effects. In other words, a tumble in gasoline prices a year ago created an unflattering base for year-over-year comparisons – hence the increase in the annual inflation rate.
Although this uptick was in line with expectations on Bay Street, several measures of core inflation – which strip out volatile movements in the CPI – raised eyebrows among financial analysts. The Bank of Canada’s preferred measures rose at an average annual rate of 3.65 per cent, from 3.55 per cent in November. Analysts were expecting a reading of 3.35 per cent.
In particular, housing prices continue to be a source of financial strain. They rose 6 per cent in December from a year earlier. Rents are generating lots of inflationary pressure, as people – including a surge of international students and other temporary residents – vie for units in short supply.
The Bank of Canada has repeatedly stressed that bringing inflation back to its 2-per-cent target could be a bumpy ride, and that it doesn’t expect to hit that mark until 2025. If core inflation doesn’t subside soon, that could make it difficult for the bank to ease off its main mechanism for restoring price stability: holding interest rates at elevated levels to slow demand in the economy.
After Tuesday’s report, traders pared back their bets on when the central bank will start to lower its benchmark interest rate, but they are still leaning toward April. The Bank of Canada is unlikely to change its key rate from 5 per cent at its next policy decision, on Jan. 24.
While bank economists were somewhat alarmed by the upturn in core inflation, they left their forecasts unchanged. Most expect rate cuts to start in April or June.
“If you are looking for data to signal a rate cut is imminent, this isn’t it,” Leslie Preston, senior economist at Toronto-Dominion Bank, said in a client note. “December’s inflation report underscores that the last mile of getting inflation all the way back to 2 per cent is the hardest.”
“Despite December’s report, we expect inflation, and the economy, will have cooled sufficiently by the spring for the Bank of Canada to make its first interest rate cut in April,” she added.
Tuesday’s inflation report showed some extreme price swings. Canadians paid 31 per cent more in airfare in December than they did in November, because of strong seasonal demand. On the other hand, prices for travel tours tumbled by around 18 per cent on a monthly basis.
At the same time, prices for home entertainment equipment fell 7.2 per cent in a single month.
“While there is clearly seasonality here, the outsized declines hint strongly at softening discretionary spending,” Bank of Montreal chief economist Doug Porter wrote to clients.
In other categories, consumers are clearly feeling the pinch. Rents jumped 7.7 per cent in December from a year earlier, up from a 7.4-per-cent increase in November. “Among other factors, a higher interest rate environment, which can create barriers to homeownership, put upward pressure on the index,” Statscan said in its release.
Economists have noted that Canada’s immigration-driven population surge is creating additional demand for rental housing units, which were already in short supply. “Canada’s housing supply has not kept up with the growth in our population, and higher rates of immigration are widening the gap,” Bank of Canada Governor Tiff Macklem said in a speech last month.
The year-over-year change for grocery prices held steady at 4.7 per cent. At restaurants, prices have risen by 5.6 per cent over the past year.
The short-term trend for the CPI with food and energy costs excluded – a measure of core inflation – is also troubling. The three-month annualized change for that indicator is 3.8 per cent, much higher than central bankers are comfortable with.
In its latest forecast, which was published in October, the Bank of Canada said inflation would linger at roughly 3.5 per cent until the middle of the year, before easing to around 2.5 per cent in the second half of 2024. (The central bank will update its forecasts next week.) Last month, Mr. Macklem said inflation could get close to 2 per cent by late this year, but he also emphasized that disinflation won’t follow a linear path.
“Over the coming months, you should expect to see some push and pull on inflation as the cooling economy reduces price pressures while other forces continue to exert upward pressure,” he said. “That’s why further declines in inflation will likely be gradual. When it’s clear that inflation is on a sustained downward track, we can begin discussing lowering our policy interest rate.”
The Bank of Canada has raised its key interest rate aggressively over the past two years – to 5 per cent from emergency lows of 0.25 per cent – to tackle the biggest price surge in four decades. The impact of these rate hikes is readily apparent in the economy, which has ground to a halt as consumers pull back on discretionary spending. At 5.8 per cent, the rate of unemployment has risen nearly a full percentage point from a record low.
Derek Holt, head of capital markets economics at Bank of Nova Scotia, offered a more skeptical take on Tuesday’s report than many of his peers on Bay Street.
In a client note, he said that “wage growth has been outpacing inflation for an extended period of time. Add in tumbling productivity. The combination of all of that makes it extraordinarily difficult to imagine the BoC cutting any time soon.”
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
