Is Canada’s inflation under control?

Is the sticker shock at the grocery store over? The numbers are looking like that is the case says RBC Assistant Chief Economist Nathan Janzen.

In an essay published January 17, Janzen said that ahead of the final consumer price index report for 2024, due next Tuesday, inflation appears to be moderating. The economist says the data may be “distorted” by the GST holiday that started on December 14, but will almost certainly be waning.

“We expect headline inflation to edge down in December to 1.5% from 1.9% year-over-year. This slowdown was largely driven by slower food price growth, which offsets an increase in energy inflation. Excluding those two volatile components, we look for core inflation to remain steady at 1.9%,” he wrote. “The Bank of Canada’s preferred “core” measures are calculated from price data that is adjusted to exclude the impact of indirect taxes, which means they should be cleaner reads. We expect the trim and median measures to hover around 2 ½ %, consistent with a softening economy that continues to weigh on domestic price pressures.”

So a package of chicken at Loblaw’s may be cheaper, but what about mortgages?

“Mortgage interest costs continue to disproportionately impact total CPI growth, and also have an impact on the core measures, but are expected to continue to slow with a lag from the BoC interest rate cuts last year. By our count, year-over-year growth in median and trim measures would have been 0.5% lower on average in November (2.2% and 2.1%, respectively) if mortgage interest costs weren’t included in the calculation.”

In the U.S., most are betting that the Fed won’t be cutting rates in the face of a white hot economy, but Canada, Janzen says, is not in the same boat.

“The release of the BoC’s Business Outlook Survey for Q4 is also out on Monday. We think inflation expectations likely continued to moderate, given readings have stayed near the central bank’s 2% target for four consecutive months,” he argued. “With job openings declining—a sign of weakening hiring demand—expected wage growth should slow further. The BoC will be paying close attention to any further deterioration in key capacity pressures such as labour shortages and supply chain disruptions. Those could signal a deeper economic slowdown, a wider economy output gap, and disinflationary risks going forward.”