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Canada inflation eases, but the fight is not over

December 21, 2022

Authored by RSM Canada LLP

Edwin P. Reilly, CPA, CA shared this article

REAL ECONOMY BLOG | December 21, 2022

Inflation in Canada inched down in November, implying more room for the Bank of Canada to raise interest rates despite a slowing economy.

November’s headline Consumer Price Index dropped to a 6.8% increase from 6.9% on a year-ago basis, remaining significantly above the 2% target rate, according to government data released Wednesday.

By now, it has become clear that the worst of the inflation problem has passed even though it will take the annual inflation rate more time to decline meaningfully.

Canada CPI

As for the question of when the Bank of Canada will pause its campaign of rate increases, we think that it will be more important to focus on the month-over-month changes to timely gauge the impact of monetary policy tightening.

Our preferred measure—the three-month annualized moving average—showed that in November, inflation was cut in half compared to its peak in May.

Still, inflation remained uncomfortably high, with all-item inflation at 5.6% while the core component inflation—which is closely watched by the Bank of Canada—was at 4.3%.

As inflation continues to be sticky, we believe the peak of the policy rates will have to be above core inflation to be restrictive enough.

That means we expect the Bank of Canada will most likely come out with more rate hikes, increasing them from the current level of 4.25% to a peak of 4.75% in the first quarter.

Higher rates also mean a greater chance of a recession. But as things stand, the consequences of doing too little outweigh the cost of doing too much.

Although the fight against inflation may have passed the most difficult phase, getting back to the 2% target might take years. That implies that a lift-and-hold framework is the best way forward.

Inside the data

Food inflation drove most of the gains in November, rising by 1.2% on the month and by 10.3% from a year ago. Shelter stayed sticky with a 0.6% increase (7.2% year over year) while health and personal care prices rose by 0.8% (5.5% year over year).

In contrast, apparel, recreation, and education and transportation prices showed the sharpest declines. Apparel fell by 0.4% on the month and by 0.4% annually, recreation declined by 1.3% on the month and by 4.1% on the year, and education and transportation dropped by 0.9% and 8.5%, respectively. All are non-seasonally adjusted.

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This article was written by Tuan Nguyen and originally appeared on 2022-12-21 RSM Canada, and is available online at

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