Canada: CPI Fell Further In December

Canada’s consumer price index fell 0.6% in December, versus consensus expectations for only a 0.2% drop. The sharp monthly decline allowed the annual inflation rate to remain unchanged at 0.8% (top chart), well below the 1.2% expected by consensus. In seasonally adjusted terms, CPI fell 0.1% as only two of the eight broad categories saw increases. Price increases for clothing/footwear (+0.3%) and health/personal care (+0.2%) were more than offset by the 0.3% decline in the transportation category and flat prices elsewhere.

Most of the broad CPI categories continue to be softer than their historic average (middle chart). Core CPI, which excludes eight of the most volatile items, also fell 0.6% causing the year-on-year core rate to drop one tick to 1.1%, the lowest since February 2011. In seasonally adjusted terms, core prices rose just 0.1%. Services year-on-year inflation remain near a two-year low of 1.6%. Four provinces NB, SK, AB, BC have annual headline inflation below the national average of 0.8%.



OPINION: The inflation data was much softer than expected, reflecting not just declining energy prices, but mostly growing economic slack in Canada. Stripping off mortgage interest costs, food and energy-related items, the picture is similarly glum, with growth in core goods prices barely in positive territory, while core services prices are growing at a pace reminiscent of the 2008-2009 recession.

For Q4 as a whole, the year-on-year headline inflation was 0.9% and core was 1.2%. That's below the Bank of Canada's January MPR estimates for the quarter of 1.1% and 1.3% respectively for the headline and the core. The soft inflation data certainly supports the BoC's dovish turn this week, and reinforces our view that interest rate hikes are highly unlikely this year.