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“Sticky” core inflation raises the odds of a January rate hike: economists

2023 01 04 14 36 05

Canada’s headline inflation reading continued to fall in November, but core inflation rose, increasing the potential for an additional Bank of Canada rate hike in January.

The headline Consumer Price Index (CPI) continued to slow to an annual growth rate of 6.8% in November, just a tick down from 6.9% in October, according to data from Statistics Canada.

But the average of the Bank of Canada’s three preferred measures of core inflation, which excludes food and energy prices, rose to 5.4% from an upwardly revised reading of 5.3% for October.

“Inflation is easing, but progress in November was slower than expected,” CIBC economist Andrew Grantham noted.

While the headline reading eased slightly and was just a tick above the consensus expectation, “of greater concern to policymakers…is that the easing in core measures of inflation (including CPI-trim, median and ex food/energy) appears to have stalled at levels still above those that would be consistent with a 2% inflation target,” he added.

Rising interest costs helping to drive inflation

Rising shelter costs contributed to the higher-than-expected inflation reading, with overall shelter costs up 7.2% year-over-year.

Within that category, mortgage interest costs were up 14.5%, “amid the higher interest rate environment,” Statistics Canada noted. This was the largest increase for this category since 1983.

Rent, meanwhile, is 5.9% above year-ago levels, with the fastest acceleration regionally in Prince Edward Island (+12.6%), British Columbia (+7.2%), Quebec (+5.3%) and Ontario (+7.1%).

These increases were balanced by a continued moderation of “homeowners’ replacement cost,” which is related to the cost of new homes. That was up 5.8%, down from a peak growth rate of over 13.6% last December.

The “other owned accommodation expenses” basket, which includes real estate commissions, was up just 3.7% (vs. 12.2% in June and a peak of 17.2% in April) as home prices continue to decline.

Both of these indexes have been slowing every month since May, reflecting a “general cooling of the housing market,” StatCan added.

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