Canada’s inflation rate unexpectedly fell to 1.9% in November, down slightly from 2% in October, according to Statistics Canada data released on Tuesday. This decline, driven by a broad slowdown in price increases, defied analysts’ predictions of steady inflation and a 0.1% monthly rise in the consumer price index (CPI). The CPI remained unchanged month over month.
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Core Inflation Remains a Concern for the Bank of Canada
While the headline inflation number dipped below the Bank of Canada’s (BoC) 2% target, core inflation measures, which exclude volatile food and energy prices, remained unchanged. CPI-median, the middle value of price changes, held steady at 2.6%, and CPI-trim, which removes the most extreme price fluctuations, stayed at 2.7%. These figures, revised upwards for the previous month, suggest underlying inflationary pressures persist.
Economists point out that this persistent core inflation could pose a challenge for the BoC. The central bank has emphasized the importance of easing interest rates to support the economy as inflation consistently declines. However, with core inflation trending around 2.7%, well above the BoC’s fourth-quarter forecast of 2.3%, the central bank faces a complex decision.
Interest Rate Decision Looms as Inflation Data Arrives
The November inflation data is the first of two reports the BoC will consider before its next interest rate announcement on January 29th. The bank has already implemented significant rate cuts totaling 175 basis points since June, including 50 basis point reductions in each of its last two policy meetings. These cuts have helped keep inflation within the BoC’s target range of 1-3%.
BoC Governor Tiff Macklem recently signaled that future rate cuts might be more gradual. Current market expectations suggest a 55% probability of a further 25 basis point reduction in January. Following the release of the inflation data, the Canadian dollar weakened slightly against the US dollar.
Factors Contributing to the Inflation Slowdown
Several factors contributed to the lower inflation figures. Lower prices for travel tours played a significant role, although the decline in travel service costs was less pronounced than in October due to higher hotel prices coinciding with major concert events.
Retail discounts associated with Black Friday sales also exerted downward pressure on overall inflation. Mortgage interest cost inflation continued its deceleration for the 15th consecutive month, further contributing to the slowdown.
In contrast, rent prices accelerated, rising 7.7% in November compared to 7.3% in October. Grocery prices saw a slight moderation, increasing 2.6% year-over-year, down from 2.7% in the previous month.
Conclusion: A Mixed Picture for the Canadian Economy
November’s inflation data presents a mixed picture for the Canadian economy. The headline inflation rate falling below the 2% target appears positive. However, persistent strength in core inflation measures may raise concerns for the Bank of Canada as it prepares for its upcoming interest rate decision. The central bank must carefully weigh these factors to determine the appropriate course of action for monetary policy in the coming months.
