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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