Lower gas prices pull inflation back to 6.3% in Canada in December

Gas prices drove the slowdown in CPI, but the cost of food was still up 11%

A person shops in the beverage aisle at a grocery store in Toronto, Ontario, Canada November 22, 2022.  REUTERS/Carlos Osorio
A person shops in the beverage aisle at a grocery store in Toronto, Ontario, Canada November 22, 2022. REUTERS/Carlos Osorio

Inflation in Canada increased 6.3 per cent in December from last year, Statistics Canada said on Tuesday, as gas prices fell but mortgage interest costs continue to rise and the cost of food remains stubbornly high.

While the December increase in the Consumer Price Index (CPI) marks the third straight month where inflation decreased from the prior month, economists say the deceleration will do little to discourage the Bank of Canada from hiking interest rates again next week.

On a monthly basis, Statistics Canada said inflation fell 0.6 per cent from November, or a seasonally adjusted 0.1 per cent. The decrease is the largest since April 2020, and was mostly driven by slower growth in the price of gasoline, the data agency said. In November, CPI hit 6.8 per cent.

Economists surveyed by Bloomberg had expected inflation to increase by 6.4 per cent on an annual basis in December.

Statistics Canada says the slowdown in gasoline prices was offset by increased mortgage interest costs, clothing and footwear, and personal care supplies and equipment.

Canadians paid 13.1 per cent less for gas in December compared to the previous month, the largest monthly decline since April 2020, as crude prices fell globally. On an annual basis, gas prices edged up 3 per cent, a marked difference to the 13.7 per cent year-over-year increase in November.

Shelter costs rose 7 per cent in December, with rent prices up 5.8 per cent and mortgage interest costs up 18 per cent as the Bank of Canada's rate hikes continue to bite.

Grocery prices eased slightly, with food purchased from stores increasing 11 per cent in December, a marginally slower pace from the 11.4 per cent increase in November. The price of eggs surged 16.5 per cent, dairy products were up 11.4 per cent, bakery products up 13.5 per cent, and fresh vegetables up 13.6 per cent.

What CPI means for the Bank of Canada rate

The CPI increase comes as the Bank of Canada continues to try to tame inflation by rapidly hiking interest rates. The central bank hiked its benchmark rate by 400 basis points through 2022, bringing the rate to 4.25 per cent.

The Bank of Canada's closely watched trim and median core inflation measures were up 5.3 per cent and 5 per cent, respectively. While inflation remains well above the central bank's target of 2 per cent, it has steadily decreased from a peak of 8.1 per cent in June.

Still, economists expect the decrease is not enough to discourage the Bank from hiking its benchmark rate again next week.

"The good news is that inflation is easing, and that will become more noticeable when the big monthly increases seen this past spring start to drop out of the annual calculation this year," CIBC Economics executive director Karyne Charbonneau said in a research note.

"Moreover, core inflation excluding mortgage costs is growing at a pace much closer to target. However, given the strong December job's report and tightness in the labour market, that likely won't be enough to deter the Bank of Canada from raising rates 25 basis points one last time next week."

BMO Capital Markets managing director of Canadian rates Benjamin Reitzes wrote in a note that the slow pace of improvement in inflation "will bring little comfort to policymakers."

"Underlying price pressures remain sticky for now," Reitzes said.

"While the direction is at least mildly encouraging, there's nothing in this report to keep the Bank of Canada from hiking rates another 25 basis points at next week's policy meeting."

The Bank of Canada is scheduled to deliver its next rate decision on January 25.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

Download the Yahoo Finance app, available for Apple and Android.