Canadian Inflation and Business Outlook Survey Signals Economic Softening

The upcoming final consumer price index (CPI) report for 2024, scheduled for release on Tuesday, is anticipated to draw significant attention as it may provide further insights into the easing of underlying price pressures in Canada. However, it is important to note that the released data may be affected by the Goods and Services Tax (GST) holiday that started on December 14. This holiday impacts a specific range of consumer purchases, which includes certain groceries, toys, and dining out.

We predict that headline inflation in December will decrease slightly to 1.5%, down from 1.9% on a year-over-year basis. This expected decline is primarily due to a slowdown in food price inflation, which counters a rise in energy costs. When looking at core inflation, which strips out these volatile categories, we foresee it remaining stable at 1.9%.

The Bank of Canada's (BoC) preferred core inflation measures, which are adjusted to exclude the effects of indirect taxes, are expected to give a clearer picture of price trends. We anticipate that the trimmed and median core measures will stay around 2.5%. This aligns with signs of a softening economy, which continues to influence domestic price pressures.

A significant contributor to total CPI growth is the high cost of mortgage interest, which also affects core inflation measures. However, these costs are anticipated to ease over time following the BoC's interest rate cuts from the previous year. Our analysis suggests that median and trimmed inflation measures would have been approximately 0.5% lower in November—at 2.2% and 2.1% respectively—if mortgage interest costs had been excluded from the calculations.

Additionally, the BoC's Business Outlook Survey for the fourth quarter will be released on Monday. This survey is expected to show a continued moderation in inflation expectations, particularly as readings have remained close to the central bank's target of 2% for four consecutive months. With a decline in job openings reflecting weakened demand for hiring, anticipated wage growth is likely to slow further. The BoC will closely monitor any additional deterioration in crucial capacity pressures like labor shortages and supply chain issues, as these indicators could signal a deeper economic slowdown and increased disinflation risks in the future.

What to Watch in the Coming Week

On Thursday, we expect Canadian retail sales for November to remain stable, consistent with Statistics Canada’s preliminary estimates. The seasonally adjusted automotive sales saw a significant rise of 8%, and sales at gas stations likely experienced a rebound in November due to increasing prices. However, this growth may be offset by weak core sales figures.

Overall, the economic landscape appears to be softening, with various factors contributing to this trend. Stakeholders and investors will be closely observing upcoming reports to gauge the future trajectory of inflation and economic activity in Canada.

inflation, economy, Canada