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Core inflation spurs traders to pare bets on Canada rate cuts – BNN Bloomberg



Canada’s core inflation measures rose at a faster pace than expected while the headline rate also ticked up due to base effects, underscoring the challenging final stretch of the central bank’s campaign to restore price stability.

The consumer price index rose 3.4 per cent in December from a year ago, following a 3.1 per cent increase a month earlier, Statistics Canada reported Tuesday in Ottawa. That matched the median estimate in a Bloomberg survey of economists and was driven by gasoline prices falling more in December 2022 than they did last month.

But two key yearly measures tracked closely by the Bank of Canada that filter out more volatile components — the trim and median core rates — also increased, averaging 3.65 per cent, from an upwardly revised 3.55 per cent a month earlier. That was faster than the 3.35 per cent pace expected by economists.

The release prompted traders to push back bets on when the central bank will begin lowering rates from April to June. 

“The pick-up in underlying inflation pressures raises the risk that the Bank of Canada will need to keep interest rates higher for longer than markets are now pricing in, with the economy suffering further as a result,” said Stephen Brown, an economist with Capital Economics, in a note to investors.

On a monthly basis, the consumer price index fell 0.3 per cent, also matching expectations. That’s the biggest decrease since December 2022, and is largely due to declines in prices for travel tours and gasoline.

Another key measure watched by the Bank of Canada, a three-month moving average of underlying price pressures, rose to an annualized pace of 3.63 per cent, from 2.94 per cent a month earlier, according to Bloomberg calculations. The uptick was largely due to higher rent and passenger vehicle prices captured by the trim core metric.

The yield on two-year government bonds rose as much as six basis points after the release to 3.893 per cent. The Canadian dollar fluctuated before settling at $1.347 per U.S. dollar just before noon Ottawa time.

This is the last of two inflation reports before the Bank of Canada’s rate decision next week. The majority of economists expect the bank to keep borrowing costs unchanged, and anticipate a series of rate cuts starting in the second quarter.

Governor Tiff Macklem warned in December of a few “bumps” along the path to returning inflation to the 2 per cent target. The governor and his officials held the benchmark overnight rate at 5 per cent for the third straight meeting last month, saying they’re still concerned about the outlook for price pressures. 

What Bloomberg Economics Says….

“Ultimately, we expect softening economic conditions and a loosening labor market — paired with progress on disinflation — to lead the BoC to cut policy rates mid-year, ending 2024 with its target for the overnight rate near 4.0 per cent.” 

— Stuart Paul, U.S. and Canada economist.

“If you are looking for data to signal a rate cut is imminent, this isn’t it,” said Leslie Preston, a senior economist with Toronto Dominion Bank, in a report to investors. “This leaves the Bank of Canada cautious as it considers when it will be appropriate to cut interest rates.”

However, she said despite Tuesday’s report, she expects inflation and the economy will have cooled sufficiently by the spring for the central bank to make its first cut in April.

December’s report once again shows shelter inflation as largest upside contributor to the year-over-year price gains, as past rate increases, a supply shortage and high immigration levels pushed up prices. Mortgage interest costs jumped 28.6 per cent and rent rose 7.7 per cent. Excluding shelter costs, the consumer price index rose 2.4 per cent from a year ago, versus 1.9 per cent in November.

The bank should start slashing rates as early as April, said Tu Nguyen, an economist with tax and consultancy firm RSM Canada. “Given that the economy has slowed to a crawl and that inflation at this point is mostly driven by shelter, keeping the rates higher for longer will not help,” Nguyen said in a note to investors.

The Bank of Canada cannot fix the housing shortage driving high rent growth and rising mortgage interest payments are directly caused by monetary policy, Nguyen pointed out.

On Monday, the central bank’s consumer survey showed expectations for price growth for some key consumer goods — notably food and gas — are falling, likely contributing to the decline in people’s perceptions of overall inflation. But inflation expectations for services — like rent, entertainment and dining — remain elevated, which may be holding back progress on restoring overall perceptions for price gains.

In December, services inflation slowed 4.3 per cent from a year ago, versus 4.6 per cent a month earlier. Goods inflation rose to 2.4 per cent, compared with 1.4 per cent increase in November.

The purchase of passenger vehicles index rose 2.3 per cent on a year-over-year basis, following a 1.5 per cent increase in November. The increase was led by higher prices for new passenger vehicles.

Regionally, prices grew at a faster pace from a year ago compared with November in nine of 10 Canadian provinces, except in Manitoba. Prices for fuel oil contributed the acceleration, and Atlantic Canada, where it’s more commonly used for heating homes, saw bigger price gains compared with others.

In 2023, the consumer price index rose 3.9 per cent on an annual average basis, following a 40-year high increase of 6.8 per cent in 2022 and 3.4 per cent in 2021.

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