RBC Canadian Inflation Watch

The Bottom Line:

• A rise in energy inflation in January more than offset the dampening effect of the tax holiday on prices, and drove headline Canadian CPI higher to 1.9% in January from 1.8% in December.
• Excluding the impact of indirect taxes and energy components, BoC’s preferred “core” CPI measures grew at a slightly slower monthly pace in January.
• Overall, a middle-of-the-road inflation print after an upside surprise in December is less desirable than what we and the central bank would like to see. We think the BoC will want to wait for more data for hints on how underlying price pressures are evolving excluding impact from the tax holiday, and take a pause from cutting interest rates in their next meeting in March.
• Later on this year, we think an overall weak economic backdrop (after many consecutive quarters of declines in per-capita output), and soft labour market conditions should still allow for inflation to further unwind, and the BoC to resume back on the path of easing.

The Details:

• Headline CPI growth edged higher to 1.9% year-over-year in January from 1.8% in December, with the acceleration primarily reflecting a jump in energy price growth (+5.3%), partially offsetting the impact of the federal GST/HST holiday that began mid-December.
• The BoC’s preferred core measures (CPI median and CPI trim) that exclude the impact of indirect taxes rose slightly, to 2.7% year-over-year on average from 2.5% in December. On a month-over-month basis, these measures grew at a slower 0.2% pace in January that’s more in line with BoC’s inflation target.
• The “suprecore” measure (trim CPI ex-shelter) also ticked lower, growing by 2.8% on a three-month annualized basis relative to 3.1% in December last year.
• Mortgage interest costs continue to account for a larger share of the total year-over-year CPI growth (roughly 30%), though the impact is gradually diminishing as earlier interest rate cuts kick in to lower borrowing costs.
• The breadth of price pressures remained relatively unchanged from prior month. About 51% of CPI components were showing price increases above a 3% annualized rate over the last three months. That share however is still more elevated than pre-pandemic.
• The temporary GST/HST holiday will continue to impact inflation readings in Canada, particularly for food and beverages through February. We continue to look to “core” CPI measures for a cleaner read on underlying price trends.

The Bottom Line:

• The tick lower in inflation in December to 1.8% was above our own assumption for a 1.5% increase, but largely due to a smaller than assumed reduction in prices from the temporary GST/HST holiday in December, and was still slightly below market expectations for a 1.9% reading.
• Controlling for the tax distortion, price growth was mixed but is still consistent with further signs of underlying easing in price growth.
• The CPI data will be impacted by the tax holiday into February, but a weakened Canadian GDP and elevated unemployment rate (with the potential for protectionist U.S. trade policy to make both worse) is pushing inflation expectations from businesses and households lower. That leaves the risks on price growth tilted to the downside and argue for further BoC interest rate cuts.

The Details:

• Headline CPI growth edged down to 1.8% in December from 1.9% in November, but with the slowdown entirely attributable to a drop in indirect taxes as the federal GST/HST holiday came into effect mid-month – restaurant prices fell year-over-year (-1.6%) for the first time in data going back to the 1960s.
• That tax impact was smaller than we assumed (we expected price growth overall to slow to 1.5% in December) and excluding indirect taxes, price growth picked up to 2.2% year-over-year from 1.7% in November.
• Details, though, were mixed and still broadly consistent with underlying Canadian inflation pressures continuing to ease.
• Much of the ex-taxes increase in price growth in December came from a surge in travel services prices (up 7.9% year-over-year) that are highly volatile around the holiday season.
• Growth in mortgage interest costs continued to slow as earlier declines in interest rates continue to filter through household effective borrowing costs, but still account for a disproportionate share of total year-over-year CPI growth (~30% as of December).
• Month-over-month growth in the BoC’s preferred median and trim core measures (which exclude the impact of indirect taxes) edged up to 3 1/2% at an annualized rate over the last three months, although year-over-year increases ticked down to to 2.4% and 2.5%, respectively, from 2.6% (both) in November (and by our count the year-over-year measures would have been both right around 2% if mortgage interest costs were not included in their calculations.)
• The breadth of price growth (excluding tax change impacts) over the last three months widened slightly – the share of CPI components with ex-tax price increases above a 3% annual rate over the last three months rose to 51% in December from 45% in November, but is still well below the 2022 average of 67%.

---

The scope of inflationary pressures is returning to normal levels

---

BoC’s preferred inflation measures edged up in December

---

GST/HST tax holiday distorted headline inflation reading

---

Canadian firms continue to expect input and selling price growth to slow

---

Firms’ and consumers’ inflation expectations remained low for the year ahead

---

The Bottom Line:

• Inflation readings in Canada remained within close range to Bank of Canada’s 2% target in November – ticking down to 1.9% after a slight acceleration in October.
• We expect a softening economy (falling per-capita GDP and rising unemployment) will keep pressing down on domestic price pressures going forward.
• The Bank of Canada cut the overnight rate by 50 bps as expected last week but signalled clearly that further reductions would be more gradual. That’s in line with our outlook, that expects consecutive smaller 25 basis point cuts to the overnight rate down to 2% (below the BoC’s 2.25% to 3.25% estimated neutral range) by July 2025.

The Details:

• There were some unusual events in November that slightly distorted price growth in specific categories. Underlying inflation pressures however continued to broadly narrow and ease.
• Headline CPI growth slowed from 2% to 1.9% with most of the major categories, especially shelter and recreation posting further softening.
• Bank of Canada’s core inflation measures – CPI trim and median both held on to a slightly faster pace of growth in November, up 0.3% on average month-over-month from October or 2.6% from last November. A chunk of that however accounts for higher mortgage interest costs, excluding which the two measures would have averaged 2.2% in November on a yearly basis by our count.
• The other closely watched ‘supercore’ measure (trim services CPI ex-shelter prices) rose 0.2% month-over-month, or 3% on a 3-month average annualized basis (up from 2.9%) based on our calculations.
• Growth in mortgage interest cost (at 13.2% year-over-year in November) continues to account for a large share of remaining price pressures. It should, however, continue to moderate following interest rate cuts.
• Rent inflation also picked up slightly to 7.7% although we don’t expect that trend will continue as market asking rents continue to decline but flow through to lower average rents with a lag.
• Food inflation in Canada ticked lower from 3% to 2.8% in November but was little changed since earlier this spring. A small uptrend in grocery inflation has been balanced off by lower inflation for dining out.
• Energy CPI in November was -1.4% year-over-year in November. Gasoline prices largely stayed flat from October but were still below year-ago levels.
• Of the distortions mentioned earlier, Black Friday sales as Statistics Canada pointed out, lowered prices for a wide swath of retail products and services. Prices for phone plans, furniture, and clothing and footwear were 8.7%, 2.2% and 3.8%, respectively below prices a year ago.
• Taylor Swift’s Toronto concerts pushed up traveller accommodation CPI from -8.5% in October to +8.7% in November. That didn’t end up contributing that much to headline inflation, as the acceleration was offset by a slowing in travel tours (to -12%) in the same month.
• Lastly, the scope of inflation pressures has remained relatively narrow in Canada. In November, 45% of the CPI basket was growing at an annualized rate of above 3% (top end of BoC’s inflation target range) over the last 3-months, down from the peak of ~80% in summer 2022.

---

The breadth of inflationary pressure is normalizing in Canada

---

BoC’s preferred inflation measures still trending broadly lower

---

Slowing economy still weighing on broader Canadian price growth

---

Global economic slowdown and demand concerns drive oil prices lower

---

Shelter inflation in Canada past its peak

---

The Bottom Line:

• The rise in the Bank of Canada’s preferred core measures (CPI-median and CPI-trim) surprised on the upside showed slight upticks on a three-month annualized basis, but remained within the 1% to 3% target range. Still, headline price growth held right at the mid-point of the BoC’s target range, despite a disproportionate share of growth coming from the mechanical pass-through of higher interest rates into mortgage interest costs.
• The minutes from the BoC’s last policy decision (50 bp cut to the overnight rate in October) noted that there could be “ups and downs” with inflation. With continuing softness in labor markets, evidenced by declining job openings and rising unemployment, we still expect price growth will drift broadly lower. The BoC is data dependent, and will see another labour market report before the next interest rate decision in December. Our base-case assumes an additional 50 basis point cut to the overnight rate by the Bank of Canada in December.

The Details:

• Headline inflation edged higher in October, driven by a smaller decline in energy price growth. With October’s reading at 2% (year-over-year), headline CPI has remained remarkably stable around the 2% target for three consecutive months.
• Energy prices were still down from a year ago, but the 3.5% annual drop was smaller than the 8.3% drop in September.
• Shelter costs continued to drive much of the remaining price pressures. Mortgage interest costs surged by 16.7% year-over-year in October (accounting for 30% of total CPI growth by our count) while home rental prices increased by 8.2%.
• Both of those shelter components are expected to see slower growth in the months ahead – with MIC growth slowing in the wake of BoC interest rate cuts and signs that asking rents are softening meaning that recent home rent price growth is unlikely to be sustained.
• Food prices grew at a faster pace in October at 3%, up from 2.8% in September.
• Excluding food and energy, inflation eased to 2.3%, slightly down from 2.4% in September.
• The BoC’s preferred core measures, CPI-trim and CPI-median, rose to 2.9% and 2.7%, respectively, on an annualized three-month rolling average. However, both have been trending lower from earlier this year.
• Inflation breadth remained narrow in October. The share of CPI components with annualized price growth above 3% over the past three months inched higher from 38% in September to 41%. But that was still way below the annual average of 67% in 2022.
• Property tax price growth, reported annually in October, accelerated this year to 6%, up from 5% in October last year, driven by tax increases implemented in major Canadian cities in 2024.

---

The breadth of inflationary pressure is normalizing in Canada

---

BoC’s preferred inflation measures still trending broadly lower

---

Slowing economy still weighing on broader Canadian price growth

---

More firms are expecting inflation to be between target range

---

Home rent price growth to ease as asking rents dip

---

• Inflation in Canada continued to broadly ease in September as expected.
• A bigger drop in gasoline prices (down 7.1% from August driven by lower oil prices and a switch to cheaper winter blends) pushed energy inflation well below 0, to -10.7% on a yearly basis in September.
• That’s the main driver behind a decline in headline CPI to 1.6% from 2% in August.
• Outside of energy inflation, both food (+2.8%) and the ‘core’ ex-food and energy CPI (+2.4%) were little changed from where they were in August.
• The BoC’s preferred CPI median and trim measures again grew by a ‘normal’ looking 0.2% month-over-month. The closely watched 3-month average annualized growth rate for the same pair also dropped slightly, to 2.1%.
• That in a nutshell implies that if growth in those measures were to persist at the same rate it did on average over the last three month, the corresponding inflation readings in a year will have been at 2.1%.
• The other closely watched ‘supercore’ measure (trim services CPI ex-shelter prices) rose 0.2% month-over-month by our count, with the 3-month average annualized growth rate slowing to 1.8% in September.
• Shelter costs continue to account for the majority of the remaining price pressures in Canada. Mortgage interest costs and home rent prices were up 16.7% and 8.2%, respectively, in September.
• Moving forward, rate cuts from the Bank of Canada should continue to provide a path lower for yearly inflation in mortgage interest costs. The reading has already slowed from a peak of over 30% in fall 2023.
• Encouragingly, the scope of inflation pressures has kept normalizing in Canada. In September, 38% of the CPI basket was growing at an annualized rate of above 3% (top end of BoC’s inflation target range) over the last 3-months, down from 63% in September a year ago and very much in line with 36% in September 2019.
• Bottom Line: On the cusp of the next BoC interest rate decision on October 23, the latest CPI report showed inflation pressures continuing to slow in Canada as expected in September. The drop in headline CPI reading may have been driven lower by lower gasoline prices but slower growth in the slew of Bank of Canada’s core inflation measures also pointed to progress. To be sure, shelter costs were still growing at a faster rate comparing to the rest of the consumer basket. But the scope of price pressure outside of shelter has now normalized more fully to what it looked like before the pandemic. Taken together with the third quarter release of the BOS survey last Friday that pointed to further unwinding in inflation pressures in the future, we think there’s little reason for the BoC to turn their worries back from a weakening economy to inflation, and expect them to go ahead with cutting by 50 bps next week.

• The slowing in year-over-year price growth to a 2.0% rate – the lowest since February 2021, and right in line with the BoC’s 2% inflation target – was largely driven by lower gasoline (and oil) prices but broader underlying inflation pressures also showed further signs of easing.
• The BoC’s preferred median and trim measures both posted ‘normal’ looking 0.2% month-over-month increases that pushed the closely-watched 3-month average annualized growth rate for the pair down to 2.4% from 2.8% on average in July.
• Trim services ex-shelter prices (sometimes called BoC supercore) rose 0.2% month-over-month by our count, with the 3-month average annualized growth rate slowing to 2.5% in August from 3.0% in July.
• Shelter costs are still one of the remaining pockets where prices are rising rapidly. Home rent prices were up 8.9% from a year ago in August. Mortgage interest cost growth has started to slow but are still 18.8% above year-ago levels in August. Those two price components accounted for ~two-thirds of the total year-over-year CPI increase in August by our count. higher shelter costs (among the most non-discretionary of non-discretionary purchases) will continue to cut into household purchasing power for other products.
• By our count, 46% of the CPI basket was growing at an above 3% rate over the last 3-months (month-over-month annualized rates), down from 49% in July.
• Food price growth held steady at a 2.7% year-over-year rate (unchanged from July) an energy prices fell 4.7% from a year ago on lower gasoline (and oil) prices.

Bottom line: Broader inflation pressures look to be back around the 2% inflation target, and interest rates are still at levels high enough to restrict economic growth and push price growth lower. Per-capita GDP already down in 7 of the last 8 quarters and the unemployment rate up more than a percent from a year ago. Against that backdrop, the path to further BoC interest rate cuts is clear. We continue to expect a gradual rate cutting path (25 basis points per meeting) down to a 3% overnight rate with risks tilted to potentially larger cuts if the economy softens significantly further.

Lower oil and gasoline prices pushed headline inflation down, from 2.5% year-over-year in July to 2.0%.

The Bank of Canada’s preferred core measures ticked lower, with rates slightly above the 2% target on annualized three-month rolling average basis.

The share of CPI basket with high inflation rate (>3%) continued to decrease.

Mortgage interest costs are expected to slow further as rate cuts take effect, but rent CPI is not coming down yet.

• Headline inflation kept easing in Canada in July to 2.5% year-over-year that was the lowest reading since March 2021.
• The yearly readings for both food (2.7%) and energy inflation (0.4%) were little changed. Gasoline prices were slightly higher than both last month and July a year ago. That in turn means the moderation in headline CPI came from everything else – core ex-food and energy CPI dropped to 2.7% year-over-year in July from 2.9%.
• In July, shelter inflation slowed to 5.7% year-over-year following persistent easing in CPI for mortgage interest costs (MIC) since fall of 2023. MIC inflation in July was still high, up over 20% from a year ago. Excluding that, headline inflation in Canada has been trending around the 2% target since January this year.
• Rent inflation is another spot that pressures are easing but slowly – rent CPI in July was still elevated at 8.5% above last year. Meanwhile sluggish resale market performance is keeping a lid on inflation for owned home expenses, which remained negative on a yearly basis.
• Bank of Canada’s preferred “core” CPI measures – CPI trim and median both grew at a slower pace in July, more in line with very small increases in the spring after having accelerated in May and June. On a month-over-month seasonally adjusted basis, the two measures averaged 0.1% above June.
• The “supercore” CPI measure, i.e., BoC’s trim services ex-shelter index grew at a similarly slow pace, up 0.1% from June to leave the three-month annualized reading at 3%, down from 3.3% in June.
• Among other components, a smaller than expected seasonal upswing in airfare and travel tours in July left prices for both dipping below levels a year ago. Improved auto inventory as supply chain knots continue to untie also led a persistent slowing in auto inflation. Prices for new cars were about 1% above last year and prices for used cars dropped to 6% below.

Bottom line: Today’s CPI print should be enough to quell concerns about sticky inflation pressures in Canada after two marginal upside surprises in May and June. Readings were unequivocally weak – with slowing evident among all core CPI measures. The scope of price pressures also continued to normalize – the diffusion index says the breadth of inflation in Canada is looking similar to pre-pandemic norm in 2019. That’s good news for the Bank of Canada, who is actively turning their focus onto a weakening economic backdrop and the disinflationary pressures that could stem from that moving forward. The hurdle for more BoC cuts this year is low and we continue to look for another 25 basis point cut at their next meeting in September.

• Headline inflation edged lower to 2.5% year-over-year, down from 2.7% in the prior month
• Mortgage interest costs still accounted for a large share of the price growth
• Growth in the BoC’s preferred ‘core’ measures continued to slow and the breadth of inflation pressures has narrowed
• Businesses are expecting a slowdown in wage and price hikes.

• After an upside surprise in May, inflation trends in Canada largely resumed lower in June with headline CPI dropping to 2.7% from 2.9%.
• The decline in headline inflation mostly reflected easing in energy CPI growth (to 0.5% year-over-year in June) following a 3% drop in gasoline prices month-over-month from May. That was enough to offset a rise in food inflation to 2.8% from 2.4% in May.
• June was the second month that growth in food prices accelerated. On a monthly seasonally adjusted basis, food prices rose at a 0.6% average rate in each of May and June, much faster than the -0.03% pace between January and April this year.
• Excluding food and energy, core CPI held unchanged at 2.9% year-over-year from May. Other “core” CPI measures that the Bank of Canada pays close attention to, including CPI trim and CPI median both rose at a slower 0.2% (seasonally adjusted) in June. That leaves the yearly reading for CPI trim unchanged at 2.9%, and for CPI median slightly lower at 2.6%.
• The “supercore” CPI measure, i.e. BoC’s trim services ex-shelter index again rose by a larger 0.3% in June on a seasonally adjusted basis, matching the reading in May. That pushed the three-month annualized reading of the same measure higher to 3.4% in June from 3%.
• Nonetheless, from the BoC’s perspective the broader picture remains that inflation pressures are easing in Canada – the closely watched 3-month rolling average increases in the preferred core measures rose but that was following a string of earlier downside surprises so the 6-month rolling average continued to ease.
• On the goods side, persistent unwinding in global supply chain challenges and diminishing demand over the past years continue to feed through to lower goods inflation in Canada. In June, prices for durable goods were 1.8% below a year ago, driven by price drops in used cars (-4.5%) as auto inventory improves, and in furniture (-3.9%).

Bottom line: June’s CPI print was a small relief after an upside surprise in May, with headline inflation matching consensus expectation prior to the release. Bank of Canada’s preferred CPI trim and CPI median both dropped lower on a monthly basis although the narrower “supercore” measure held slightly higher. Yesterday’s second quarter release of the BoC’s Business Outlook Survey largely confirmed further normalizing in a few key areas that the central bank has deemed critical to future inflation trends, including firms’ pricing behaviour, their expectations for inflation in the future as well as wage growth. All told, we expect the BoC will carry on with easing the monetary brakes on a weak economy, and follow up with another rate cut at its July meeting next week.

• Headline inflation slowed in June due to slower energy price growth
• The 3-month average of the Bank of Canada’s preferred core measures saw an uptick, but the 6-month average held right around the 2% inflation target
• Most Canadian wage measures are showing slower growth – consistent with softening labour markets
• The latest BOS survey indicated firms and consumers have lowered their inflation expectations for the next year in Q2/24.
• Canadian businesses’ believe that their input/selling price growth will continue to slow, suggesting lower inflation in the year ahead.

• Year-over-year headline inflation edged higher in May but energy price growth slowed and food inflation was little changed
• BoC’s key inflation measures ticked slightly higher on three-month rolling average basis, but still close the 2% target
• The breadth of price pressures has narrowed to pre-pandemic level in Canada
• A lower six-month rolling standard deviation of ‘supercore’ prices indicated a more stable and predictable inflation environment
• Inflation for renters is increasing faster than inflation for homeowners

• Headline inflation slowed again in April despite higher energy costs, price growth for groceries also slowed.
• Bank of Canada’s closely monitored core measures all dropped lower on a year-over-year basis and were much lower than the peak levels in mid-2022.
• The scope of inflationary pressures continues to narrow in Canada, comparing to the U.S. where pressures are again spreading in early 2024.
• Unit labour costs are high but expected to trend lower in the future, as wage growth slows.

• March’s headline inflation print inched up on higher energy costs.
• The breadth of inflation pressures narrowed again with the share of the CPI basket growing above 5% going down to 22.3% in March, from 26.0% in the prior month.
• The Bank of Canada’s favored inflation measures, CPI-median, trim, CPIX, and ‘supercore’ all edged lower with annualized 3-month growth in the ‘trim,’ ‘median’, and CPIX measures all below the BoC’s 2% inflation target in March.
• Latest Business Outlook Survey showed firms’ expected wage growth was unchanged (4.1%) from the last quarter, but it’s still much lower than the peak level (5.84%) in Q1/22.
• Businesses’ expected input and output price increases are back to pre-pandemic average levels.

• Year-over-year CPI ticked lower on lower food prices and a larger-than-expected cooling in price growth excluding food and energy products.
• The breadth of inflationary pressure continued to narrow, with the share of CPI basket growing at more than 3% edging lower to 47.8%.
• Growth in the BoC’s closely watched core measures slowed sharply and CPIX was unchanged over the last three months in February.
• Most of the price growth was still driven by shelter inflation, but mortgage interest costs have been trending lower.
• Canadian businesses on average continue to plan for smaller price increases in the year ahead.

• Year-over-year CPI growth slowed to 3.2% in January from 3.4% in December.
• Energy and food price growth slowed, but the Bank of Canada’s preferred core measures of broader price pressure also unexpectedly slowed.
• Mortgage interest cost growth is slowing but still driving a disproportionate share of CPI growth. Home rent growth is still accelerating.
• But other components of shelter inflation, such as homeowners’ replacement costs, saw improvements on lower house prices.
• Wage growth still elevated along with a strong start to the year for labour markets.

• Energy component pushed headline inflation reading higher with food price growth holding steady after slowing for 5 straight months.
• The BoC’s preferred core CPI measures bounced higher, although the breadth of inflationary pressures over the last three months continued to narrow.
• Travel tour prices declined sharply in December, reversed the jump the prior month.
• The latest Business Outlook Survey revealed more firms perceived normal/less price increases due to weaker demand
• And on the consumer side, Canadians’ expectations on rent price growth remained elevated