Inflation hit 3.4% in December

Annual inflation in Canada rose to 3.4 percent in December, driven by a sharp decrease in gasoline prices compared to the previous month, according to the latest consumer price index from Statistics Canada (CPI). The increase followed a 3.1 percent rise in November. The increase was largely expected, as economists attributed the rise to a “base year effect,” which is the effect of price movements from one year ago on the calculation of total inflation.

Inflation was also driven by a 4.7 percent rise in grocery prices in December, which was in line with the pace of growth in November. With December being the final month of the calendar year, the latest data suggests that inflation in 2023 is expected to be recorded as 3.9 percent, down from the 40-year-high of 6.0 percent seen in 2022. According to the latest CPI report, price increases in 2023 were slower in six of the eight components when compared to the previous year.

As Canada’s central bank prepares to announce interest rates next week, its attention will be focused on core inflation measures, which will provide clues as to the central bank’s ability to interpret price volatility. These annual readings did not improve last month, suggesting that inflationary pressures remain elevated. Most economists expect the Bank to maintain its key policy rate at five percent as most believe that interest rates are already high enough to contain inflation. The timing of a first interest rate hike, however, will hinge on how quickly inflation declines and how steeply the economy slows this year.

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