Morning Market Brief: December 20, 2023

Canada’s annual inflation rate remains unchanged?

In a reminder of its “persistent” nature, inflation remained unchanged in November compared to October. The rate was higher than economists were expecting, suggesting that there could still be bumps in the road to challenge inflation’s potential path toward the Bank of Canada’s (BoC) 2% target. BoC Governor Tiff Macklem expects rates to approach this target by the end of 2024.?

1. Annual inflation for November was 3.1%, which matched the rate from October, according to Statistics Canada (StatsCan). The result came in above market expectations of 2.9%.
2. Grocery price growth eased. Compared to November 2022, food prices climbed 4.7%, decelerating from the 5.4% increase in October.
3. Mortgage interest costs played a major role in the stubborn level of inflation. If the cost of shelter is completely excluded from inflation data, the rate would be 1.9%. This highlights the impact of housing costs on Canada’s economy and consumers.
4. Cell phone plan prices declined. In a separate report from StatsCan, deals on Black Friday led to a year-over-year decrease in plan costs. Plans purchased in November 2023 cost 22% less on average compared to plans from November 2022.
5. Markets might need to adjust their long-term interest-rate expectations. Prior to the pandemic, the financial community enjoyed an era of low to ultra-low interest rates. Market commentators, including Macklem, have cautioned that these rates might not return.

Even though the latest inflation data might have missed expectations, economic conditions are expected to help moderate price increases. The stickiness of inflation in Canada supports the BoC’s more cautious tone compared to the US Federal Reserve Board. It seems that BoC policymakers are looking for inflationary pressures to continue to decrease into 2024 before joining the rate-cut conversation.

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