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Encouraging signs on the inflation front

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The Consumer Price Index (CPI) stood at 6.3% in December, its lowest level in 10 months. A victory for the Bank of Canada against inflation is in sight, and faster than expected, according to economists.

The inflation rate, which peaked at 8.1% in June, ended 2022 at 6.3% in December, which is a little better than economists expected. In Quebec, price growth moderated slightly, from 6.8% in November to 6.3% in December.

What explains the slowdown in price increases?

It is once again the drop in gas prices that explains the slowdown in inflation in December. Prices at the pump fell 13.1% from November to December. This is the largest drop since April 2020, which is attributable to the fall in crude oil prices due to heightened recession risks around the world. Prices for heating oil and other fuels also fell, which contributed to slowing the growth of the overall CPI.

At 6.3%, headline inflation remains more than twice the upper limit of the Bank of Canada’s target. But beyond the monthly figures, “the trend of the last six months is encouraging,” said Stephen Gordon, economist and professor at Laval University.

Barring another shock like the war in Ukraine, we should see the inflation rate continue to decline over the next few months”.

Stephen Gordon, economist and professor at Laval University


The cost of living continues to rise, why should we rejoice?

Because prices are rising less rapidly. After rising 6.8% in November, the CPI rose 6.3% in December. Excluding energy and food prices, price growth went from 5.4% in November to 5.3% in December.

Above all, the price of several products has stopped rising at high speed, such as appliances, furniture and motor vehicles, which demonstrates that supply chains are working better and that demand is decreasing, which eases the pressure on prices.

“December’s results are among those leaving the most room for optimism to date in this long and painful struggle for price stability,” said Marc Désormeaux, senior economist at Desjardins.

When will there be an upturn in the grocery cart?

On the food side, price growth is also slowing, but very slowly. Overall, the prices of food purchased in grocery stores increased by 11% in December, slightly less than in November (11.4%). Growth in the prices of bread, coffee and tea is moderating, but that of fresh fruits and vegetables is accelerating. The price of tomatoes, for example, is up 21.9% in December.

December was the fifth month in a row that inflation was above double digits, but a slowdown in the growth of commodity prices in international markets suggests an impending lull.

“The price of foodstuffs continues to moderate, at +0.4%, which is still high on a historical basis, but the lowest in the last six months”, underline the economists of the National Bank Matthieu Arseneau and Alexandra Ducharme .

The food sector, which is a basic need, is not influenced by rising interest rates, but rather by unpredictable factors such as weather conditions.

Will interest rates rise again next week?

No, according to National Bank economists. The overall CPI is still too high, but core inflation, which the Bank of Canada is interested in because it excludes the most volatile components of the index, is already approaching the target rate, they observe. In annualized variation over three months, the CPI-tronq is at 3.6% and the CPI-med at 4.3%, they illustrate.

The improvement on the inflation front, coupled with the pessimism of companies as indicated by the survey published Monday by the Bank of Canada, should mean the end of rate hikes, according to Matthieu Arseneau and Alexandra Ducharme.

Other specialists, on the contrary, predict that the key rate will rise from 4.25% to 4.50% next Wednesday, because the slowdown in inflation is still insufficient.

Inflation is moving in an encouraging direction, but there is nothing in this report that will prevent the Bank of Canada from raising rates by 25 basis points next week.

Benjamin Reitze, BMO economist

Marc Désormeaux, an economist at Desjardins, thinks that the strength of the labor market and the high inflation expectations expressed in the Bank of Canada poll released on Monday are pushing the central bank to continue raising rates one last time before to take a break.

For the fall in rates, it will be necessary to wait a long time, believes Stephen Gordon. “The Bank of Canada is going to want to make sure that inflation gets back on target and stays there for several months before lowering rates,” says the professor.

Variations

  • Organized trips + 19.9%
  • Purchase of digital media – 10.8%
  • Motor vehicle registration fees – 28.2%
  • Margarine + 36.0%
  • Lettuce + 32.8%
  • Fresh or frozen pork – 0.7%



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