Canadian Inflation Rises to 3.4% in December, Is Relief on the Horizon?

Canadian prices climbed a bit higher in December 2023, with inflation hitting 3.4% compared to 3.1% the previous month. But before you reach for the panic button, let's dig a little deeper.

Gasoline Takes the Wheel:

The main culprit for the jump? A quirk of comparing gas prices to last year's December, when they were particularly low. Excluding energy costs, inflation actually dipped slightly from 3.8% to 3.7%.

Shelter Costs Still Sting:

Finding a cheap place to live remains challenging, with mortgage interest costs soaring 28.6% and rents rising 7.7% year-over-year.

Food Price Growth is Much Too High:

Grocery prices held steady at 4.7%. Despite the volatility from gas prices, it's clear that essential items like food and shelter keep getting more expensive, keeping inflation simmering at a steady pace.

Core Inflation Not Budging:

The Bank of Canada's preferred inflation gauges, which avoid short-term spikes, stayed put between 3.5% and 4%.

Is a Rate Cut Coming?

Even with slower economic growth and a cooling job market, many expect the Bank of Canada to lower interest rates in the second half of 2024. But that decision hinges on how inflation and the economy behave in the coming months.

Even if inflation remains high, the Bank of Canada might reduce rates if Canada enters a recession because both higher rates and lower economic growth have a dampening effect on inflation.

The Canadian economy shrank in the three months between June and September. If the economy strings again in the three months from October to December then Canada is technically in a recession.

If a recession happens, rates could begin to fall in April 2024.

The Takeaway:

While December's headline number may seem high, the big picture remains unchanged. Inflation is still stubborn, driven by essential costs, but shows signs of stabilizing.

As well, inflation is not dropping as quickly as most analysts had expected.

The Bank of Canada will likely wait and see how things unfold in the Spring of 2024 before making any significant moves.