Canadian Inflation Rate Update: Impact of Gasoline Prices and Central Bank Policy

Summary

  • Consumer prices fell by 0.3% from November, as expected.
  • The annual inflation rate was mainly influenced by an increase in gasoline prices, despite its four-month decline.
  • Excluding gasoline, yearly inflation slowed from 3.6% in November to 3.5% in December.
  • Food prices in stores recorded a 4.7% hike in December, mirroring the trend of November.
  • Stripping out energy and food costs, annual inflation rate eased to 3.4% from 3.5% in November.
  • CPI-trim, one of Bank of Canada’s core measures of underlying inflation, inched up to 3.7% while CPI-median stayed at 3.6%.
  • Headline inflation has surpassed the central bank’s midpoint target of 2% since March 2021.
  • The Canadian central bank lifted its key policy rate to a 22-year peak of 5% to control inflation.
  • The upcoming interest rate announcement by the central bank on Jan. 24 is anticipated to keep the key policy rate unchanged.
  • Market players and economists are anticipating an interest rate cut in the first half of 2024.
  • The BoC forecasts inflation to reach its target by the end of 2025.
  • Canadian firms reported a decline in order books in Q4, indicating an easing of inflation.

Influence of Energy Prices on Inflation

The yearly inflation rate was substantially affected by an uptick in gasoline prices in the last month compared to the same period the previous year. Despite a consecutive four-month drop in its price, the impact is significant, according to Statistics Canada.

Price Movement of Consumer Goods

Consumer goods prices met expectations, as they plummeted 0.3% from November on a monthly basis. The prices of food items bought from stores climbed 4.7% in December, at the same annual rate as November.

Measuring the Underlying Inflation

The Bank of Canada’s (BoC) underlying inflation indicator, the CPI-trim, saw a minor increase to 3.7%, while the CPI-median held steady at 3.6%. The lack of a notable slowdown in key measures suggests a gradual easing of inflation.

Central Bank’s Strategy to Tame Inflation

To curb inflation, the Canadian Central Bank elevated its chief policy rate to a 22-year high of 5%. The next announcement related to interest rate, scheduled for Jan. 24, is expected to maintain the main policy rate.

Outlook on Inflation and Interest Rates

Markets and economists foresee the commencement of rate cuts in the first half of 2024. Governor Tiff Macklem of the BoC, in his last public appearance of 2023, announced inflation returning closer to the target by year-end.

In the final quarter, Canadian companies reported a drop in their order books as consumer spending was impacted by interest rates. This suggests a potential slowdown in inflation, as per the BoC survey conducted on Monday.

In relation to forex trading, these developments surrounding inflation and interest rates could influence the value of the Canadian dollar and related forex pairs.

PIP Penguin
Logo