Canadian Inflation Accelerates, Moderate Recession Has Kicked Off

Canadian headline inflation is heading in the wrong direction. The Statistics Canada (Stat Can) Consumer Price Index (CPI) shows annual growth at 3.4% in December, up 3.4 points compared to a month before. The rate is higher than anticipated, but attributed to the base effect of a few components. At least one prominent economist believes Canada is already in recession, which should lower demand and thus inflation in the near-term. 

Canadian Inflation Accelerated Largely Due To Gasoline Base-Effect

Stat Can largely attributes the acceleration to a base-year effect with gasoline. A base-year effect is when the original period in a comparison experienced an abrupt distortion. Annual growth of gasoline prices were 1.1% in December, a big change from the decline of 7.7% reported in November. In this case, it was due almost entirely to the shift in prices from November to December 2022. The rigid 12-month comparison masks the monthly decline of 4.4% in December 2023. 

Shelter costs also continue to push inflation higher, rents in particular. CPI estimates annual growth of 7.7% in December, adding 0.3 points to November’s rate. 

Source: Statistics Canada.

Bank of Canada’s Preferred Inflation Measure Continues To Slow

The central bank’s preferred measure also set aside inflation concerns. Core CPI shows 3.4% annual growth in December, 0.1 points lower than November. This measure excludes the two most volatile components, energy and food, which tend to be influenced by global production. By excluding these measures, central banks can better focus on the role of local currency driving inflation.  

A Prominent Economist Believes Canada Is Already In Recession

Falling inflation is typically a sign of reduced demand, helping to ease supply concerns. This is typical ahead of a recession, and the Bank of Canada (BoC) has warned they expect a mild one. At least one prominent economist felt they’re underestimating the outlook, especially against a backdrop of today’s CPI data. 

“Unlike the Bank of Canada which still anticipates a soft landing, we believe the economy has slipped into a moderate recession,” explained Tony Stillo, director of Canadian economics at Oxford Economics

His less than rosy perspective continues, “In our view, growing slack from the deepening downturn, alongside an easing of global oil and world food prices will help return headline CPI inflation to the Bank of Canada’s 2% target by late 2024.” 

The BoC has maintained a hawkish tone, implying they’re ready to raise rates if need be. However, Stillo’s outlook doesn’t include much potential for higher rates in this environment. 

“This means further rate hikes by the BoC are not warranted and we expect it will keep the policy rate steady at 5.0% until June when it will begin to gradually ease to 4.25% by year-end,” he concludes. 
Expectations of easing rates have already led to lower financing costs, boosting demand. However, Oxford Economics’ rate forecast is in line with most forecast estimates. At that level, financing costs might be lower than today but would be considered lofty in contrast to the decade-plus low rates driving the Canadian debt binge. That has experts skeptical of any substantial near-term growth.



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  • Kate 4 months ago

    Please low the base interest rate BoC to have a full flange recession.

    • Fraser 4 months ago


      • Harold 4 months ago

        Makes you wonder. Great article. Really showcases the need for higher rates. We’ve pushed this problem downhill for too long, and its picked up too much momentum… We need to put an end to this debt cycle, and get out of the hole we’ve put ourselves in. This recession is going to be painful.

  • Andrew Baldwin 4 months ago

    The jargon used by Statistics Canada in the Daily Brief is absolutely brutal, and impedes rather than aids understanding of what is going on. The big change in the 12-month inflation rate for gasoline is an excellent illustration of this. StatCan speaks about a base year effect, when even if one accepts their quite unhelpful concentration on the change in the base from the November 2023 to the December 2023 inflation rate, there is no base year effect, only a base month effect, since the base changes from November 2022 to December 2022. But this concentration on the base month serves no useful purpose anyway.
    It is obvious, or should be, that if there were no difference between the monthly inflation rates for December 2022 and December 2023, there would be no change in the 12-month rates of inflation for November 2023 and December 2023. At the same time, it is NOT true that the monthly inflation rate for December 2023 less the monthly inflation rate for December 2022 will match the change in the 12-month inflation rates. The former is 8.6 percentage points, the latter is 9.2 percentage points, so there is a big part of the difference unaccounted for. (The difference in 12-month inflation rates appears to be 9.1 percentage points, due to rounding error.)
    In fact the appropriate calculation is to calculate the exit effect as the difference between the 11-month inflation rate for December 2022 to November 2023 (6.1%) and the 12-month inflation rate for November 2022 (7.7%), which is 13.9%. This is 0.8 percentage points more than the negative of the -13.1% monthly change for December, as that monthly change is amplified by the subsequent increase in gasoline prices for the December 2022 to November 2023 period. The entry effect can be calculated residually but there is a formula for it, too. Statistics Canada should properly designate exit effects, which can take an absolute value either larger or smaller than the absolute value of the monthly price change leaving the 12-month inflation rate.

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