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Inflation eased in December, but the path back to 2% will be long

The latest Economic Quick Take from The Conference Board of Canada is available now. Here are highlights and key insights into Statistics Canada's January 17 Consumer Price Index release.

  • In December, the Consumer Price Index (CPI) rose by 6.3 per cent (y/y). This was lower than the consensus estimate of 6.4 per cent (y/y) and November’s 6.8 per cent (y/y) increase.
  • Gasoline prices fell by 13.1 per cent (m/m) but were 3.0 per cent higher than a year ago. Year-over-year, food prices increased in stores (+11.0 per cent) and restaurants (+7.7 per cent).
  • Core CPI (excluding food and energy) was up by 5.3 per cent in December (y/y), lower than the 5.4 per cent increase (y/y) in November. Higher prices in several shelter and food subcategories were key contributors to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI fell by 0.1 per cent in December (compared to a 0.3 per cent gain in November).
  • The average of the Bank of Canada’s three core inflation measures fell to 5.6 per cent in December. CPI-median dropped to 5.0 per cent, CPI-common dipped to 6.6 per cent, and CPI-trim inched down to 5.3 per cent.

Key Insights

The final inflation report of 2022 has landed—and year-over-year price growth remains aloft. Last year, consumer prices in Canada rose by 6.8 per cent—the highest rate of price growth in Canada since 1982. In December, high rent and rising mortgage interest costs kept shelter price growth elevated. Food prices, which continue to feed consumers’ inflation expectations, also climbed. There were some positive signs in December’s report, including lower month-over-month prices for energy and a modest drop in core inflation. But, on balance, the latest CPI figures remain too high for comfort.

The best laid plans of central banks often go awry. The Bank of Canada implied it could pause its monetary policy tightening cycle after its December interest rate hike. But stubbornly high core CPI and resilient labour market readings over the past month may force the Bank’s hand to raise rates again on January 25. If the Bank has shifted to a “data-dependent” rate-raising approach, a quarter-point rate increase later this month seems likely. It takes time for the full inflation-fighting impact of higher rates to kick in, but Bank officials have stressed that they won’t take any chances in getting inflation down sooner to avoid greater pain later.

Canadians can expect price growth to meaningfully subside this year. There are no quick and easy solutions for the inflation problem or for assuaging Canadians’ concerns about higher prices. But as higher interest rates sap economic activity, year-over-year price growth will ease substantially. It will likely be back within the Bank of Canada’s inflation target range by December 2023. Until then, unfortunately, higher prices will inflict further pain on household finances.

The Conference Board of Canada is an independent, applied research organization.

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