Canadian economists expect the worst to be over for headline inflation

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Economists at Canada’s largest banks believe that the pace of headline inflation slowed in November as last year’s rate hikes continued. But they expect pressures on core inflation to continue, potentially casting a shadow over what should otherwise be good news for Canadian consumers.

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The rough consensus among economists is that figures released on Dec. 21 show that inflation eased in November from the 6.9 percent annual rate posted in October.

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Douglas Porter, chief economist at the Bank of Montreal, said in a recent podcast that the worst appears to be over for headline inflation, which has already fallen from a peak of 8.1 percent in June, mainly due to falling energy prices. The same cannot be said for core measurements.

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“Meanwhile, it’s a very different picture when we look at underlying inflation and I think that’s what the Bank of Canada and the Fed are going to focus on now, and we really haven’t seen any relief in that case.” Porter said this week on an episode of BMO’s Smarter Investing Podcast, “In Canada, core inflation is actually still going up.”

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Core inflation measures exclude food and energy prices. Without them, inflation has remained higher, standing at 5.3 percent in October compared to 4.2 percent in the first quarter. Porter said that even if Canadians continue to see price pressures at gas stations ease, the easing of core measures will be frustratingly slow.

BMO economists expect headline inflation to slow about four ticks to a year-over-year rate of 6.5 percent as November tends to see a pause in consumer prices, but food is an exception.

“November has historically been the second strongest month of the year for food prices, and we expect no difference this year, with an increase of nearly one percent,” BMO senior economist Robert Kavcic wrote in a Monday note to clients. “Besides food and energy, November tends to be a soft month for inflation.”

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Kavcic added that as housing costs fall due to lower house prices this year, related categories such as furniture and bedding have also slowed.

Royal Bank of Canada economists also expect inflation to cool in November, but not as much as BMO. RBC Economics predicts consumer price index growth will cool to 6.7 percent as global inflation eases, though economists expect food prices to be 10 percent higher than last year.

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“The (Bank of Canada) has pointed to those early signs as a reason rates need not rise further after a 50 basis point rate hike last week,” economists Nathan Janzen and Carrie Freestone wrote in a Dec. 19 note. “The economy is also expected to weaken in the coming quarters as 400 basis points of interest rate hikes in 2022 reduce household purchasing power, further easing inflationary pressures.”

During the year, the central bank raised its policy rate to 4.25 percent in what it has described as a “front-loading” strategy to quell decades of high inflation. Bank of Canada Governor Tiff Macklem is aiming to avoid a repeat of the 1970s and 1980s, when inflation was rampant and jumped several times before finally being suppressed, even if it meant putting the country in a recession hits.

The Bank of Canada ended the year with a 50 basis point hike and suggested in its accompanying statement that the board may need to consider whether further rate hikes are needed.

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