Canadian Consumer Price Index (December 2022)

Another welcome cooling in inflation in December

• Consumer price inflation continued to come off the boil in December, up 6.3% versus a year ago (y/y), from 6.8% in November. 
• The decline in energy prices gathered speed in December, as prices at the pump fell 13.1% month-on-month (m/m). Gasoline prices are now only 3% higher than a year ago. 
• Food inflation also cooled slightly in December, with grocery costs up 11% y/y, versus 11.4% in November. 
• In a sign that consumer demand is cooling and supply chains are less constrained, durable goods prices decelerated for the third consecutive month in December to 4.7% y/y from 5.3% y/y in November. Prices for household appliances saw the largest decline on record (-4.1% m/m). 
• Underlying inflation pressures also lost some steam, with CPI ex-food and energy up 5.3% y/y, down from 5.4% in November. All three of the BoC's core inflation measures moved in a positive direction in December. But most importantly, CPI-trim was 5.3% y/y (5.4% in Nov.) and CPI-median was 5% y/y (5.1% in Nov.).
• The improvement in core inflation was helped by shelter inflation decelerating to 7% y/y from 7.2% y/y in November. Inflation for homeowners' replacement continued to come down to 4.7% y/y in December from 5.8% y/y in November thanks to a slowing resale market. Although mortgage interest costs remained a key source of upward pressure, up 18% y/y versus 14.5% in November.   

Key Implications

• December's CPI report showed that Canadian inflation continues to come off the boil, but at 6.3% remained well above the Bank of Canada's 1-3% target. As outlined in our last Quarterly Economic Forecast, we expect the cooling process to continue, but it will require consumer spending to effectively grind to a halt. Core inflation pressures are decelerating more slowly than headline, but are roughly consistent with our December forecast.
• This is the last inflation reading the Bank of Canada will get before its rate decision on January 25th. Despite signs from the consumer and business surveys that Canadians are tightening their belts as they brace for recession, the battle against inflation has not turned enough for the BoC to declare victory. As outlined in our last Dollars & Sense, we expect the Bank will make one last quarter point hike next week, and then pause to assess the cumulative impact of a year of dramatic tightening on the economy. 

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