Monetary policy can’t fix food inflation, RBC says

In a Dec. 15 report, RBC senior economist Claire Fan said headline inflation in Canada held steady at 2.2% in November, with mixed underlying details that reinforce the Bank of Canada’s current holding bias on interest rates.

Fan noted that while the Bank of Canada’s preferred core inflation measures continued to ease, food inflation accelerated to its highest level since late 2023, driven largely by supply-side pressures that monetary policy cannot readily offset. Food prices rose 4.2% year over year in November, up from 3.4% in October, led by sharp increases in grocery items such as fresh or frozen beef, which rose 17.7%, and coffee, up 27.8%.

She said the food inflation pickup reflects a combination of domestic and global supply constraints rather than excess demand. In Canada, earlier drought conditions in Western provinces have reduced cattle herds, while dry weather in Brazil and Vietnam has curtailed global coffee production. Fan also pointed to indirect tariff effects, noting that although Canadian importers are not directly paying U.S. tariffs, higher costs are being passed through supply chains by U.S. exporters. Statistics Canada has cited rising refined coffee prices as one example linked to U.S. tariffs on coffee-producing countries.

By contrast, inflation components more sensitive to interest rates showed further moderation. CPI-trim and CPI-median each rose just 0.1% on a seasonally adjusted basis from October, pulling their year-over-year rates down to 2.8%. On a three-month annualized basis, both measures slowed to 2.3% from 2.6% previously.

Fan said this easing in underlying inflation supports the view that the central bank does not need to pivot toward rate hikes in the near term. At the same time, she added that recent improvements in economic and labour market conditions suggest additional cuts to the overnight rate are also unlikely.

Excluding food and energy, inflation fell to 2.4% in November from 2.7% in October, partly reflecting lower travel services prices, which were distorted last year by elevated accommodation costs during major concert events. Shelter inflation also continued to cool, easing to 2.3% from 2.5%, driven by slower rent growth and decelerating mortgage interest costs following earlier rate reductions.

Energy prices remained five per cent below year-ago levels despite recent monthly increases in gasoline prices, with the year-over-year decline still largely reflecting the removal of consumer carbon surcharges in April.

Fan noted that inflation breadth widened modestly, with about 54% of CPI components growing faster than three% on an annualized three-month basis, up from 50% in October. A narrower “supercore” measure that strips out goods and shelter rose 0.2% on the month and remained elevated at 3.2% year over year, suggesting pockets of persistence remain.

Overall, Fan said the November data are consistent with inflation stabilizing near the two-per-cent target, supporting a prolonged pause in policy as the Bank of Canada balances easing price pressures against improving economic momentum.

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