Gasoline prices help drive inflation up to 3.4%

Canada's annual inflation rate jumpedto 3.4 per cent in December,according to data released by Statistics Canada on Tuesday.

That's after both October and Novembersaw inflation hold steady at 3.1 per cent compared to the previous year.

StatsCansaid that the price of gasoline, air travel, passenger vehicles and rent drove the figure higher in December.

Food prices at stores also went up 4.7 per cent compared to last year,the same rate of increase as in November.

According to Doug Porter, chief economist with Bank of Montreal, the latest consumer price index measurements aren't a surprise.

"That's a big improvement from where we were a year ago," he said. "But it's still just a little bit too high for comfort."

Porter noted that Canadians may be spending less on what he called "discretionary spending" with travel tours in particular showing a drop, along with some recreational categories.

"We're seeing a little bit of underlying softness. People are still willing to spend there, but just not nearly as to the same extent as they might have a year or two ago," said Porter.

Without gasoline, inflation dropped compared to November

In its release, thefederal statistics agency pointed outthe headline figure of 3.4 per cent inflation was "largely the result of higher year-over-year prices for gasoline in December."

While StatsCan says gasoline prices actually fell in December 2023 when compared directly to the previous month, back in December 2022 gasoline prices hadcomparatively falleneven more.

This leads to something called the"base-year effect," where comparing today's figures to last year's can show a wider gap. It's partly because of this effect that many economists predicted inflation numbers similar to what was released today.

If gasoline prices were excluded, Statistics Canada said the consumer price index for December would be even higher than today's headline numberand would be3.5 per cent.

But inflation minus gasoline in December was lower than inflation minus gasoline in November.

Inflation remains higher than central bank target

With the so-called "headline" inflation number at 3.4 per cent, the economic measure is still higher than the Bank of Canada's target of two per cent.

The central bank has increased interest rates10times since early 2022 to try and tamp down high inflation rates, and while a slowdown in inflation has led Bank of Canada governor Tiff Macklem to keep rates steady at five per cent for the last few months, many economists predict a rate cut could come sometime in 2024.

Speaking at the end of 2023, Macklemsaid it was too early to say if or when that would happen.

Bank of Montreal haswritten that it believes December 2023's inflation data still points to interest rate cuts in mid-2024, whileCIBCis predicting the central bank will need to see "more progress" on some elements of inflation before considering a drop in interest rates.

"It's really not quite there yetfor where the Bank of Canada would like to see it," said Doug Porter with regard to the latest inflation rates.

"They are worried thatinflation pressures might just be smouldering at this point. Itwouldn't really take that much to ignitethem again."

WATCH | Inflation creeps up again:

Inflation edged back up in December in Canada

8 months ago

Duration 1:48

Canada's overall inflation rate ticked back up to 3.4 per cent in December, according to the latest Consumer Price Index numbers from Statistics Canada. Experts say the numbers will give the Bank of Canada pause over whether to reduce interest rates in the coming months.

The inflationdata comes a day after aBank of Canada survey showed Canadians are increasingly cutting back on spending, while mortgage-holders remain confident they can keep up with higher payments when their loans renew.

According to the central bank's fourth-quarter consumer expectations and business outlook surveys, roughly two-thirds of Canadians said they were reducing spending or planning to do so because of their expectations for interest rates and inflation.