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Economists expect inflation rose in December

Economists in Canada are predicting a slight uptick in the inflation rate for December, though experts assure the public that this is not a cause for alarm, provided underlying price pressures continue to ease. The forthcoming consumer price index report from Statistics Canada, scheduled for release on Tuesday, will provide insights into the overall inflation rate for the entire year of 2023.

Forecasts suggest that December's inflation rate is likely to surpass November's 3.1 per cent, primarily attributed to a more significant drop in gasoline prices a year ago compared to the last month. This phenomenon is known as a "base-year effect." CIBC, a prominent financial institution, anticipates the inflation rate to be around 3.4 per cent, largely influenced by base effects from gasoline prices, as explained by Andrew Grantham, CIBC's Executive Director of Economics.

A recent report from the U.S. Labor Department indicated an increase in inflation south of the border, reaching 3.4 per cent, up from 3.1 per cent in November. Higher housing costs, energy, and food prices were identified as the driving factors behind this rise. However, economists emphasize that even if annual inflation shows an increase, it does not necessarily indicate a negative trend in price growth.

The Bank of Canada places particular emphasis on core measures of inflation, which exclude volatile price movements. A decline in these figures suggests that price pressures are diminishing, providing some relief to the central bank. In the U.S., despite a rise in headline inflation, core prices experienced their slowest pace since May 2021, rising by 3.9 per cent in December.

TD's Director of Economics, James Orlando, expects December's inflation in Canada to be 3.3 per cent. He notes a considerable easing of inflation in recent months, with the three-month annualized rate for core inflation measures hovering in the two to three per cent range. Orlando suggests that people should focus on this trend as it guides the year-on-year number over the coming months.

Despite expectations of a slowdown in food inflation, grocery prices have been rising at a softer pace, increasing by 4.7 per cent year-over-year in November. Grantham warns that while this may suggest a relative improvement, it doesn't necessarily translate to increased affordability for families, given the ongoing rise in prices.

The Bank of Canada maintained its key interest rate at five per cent throughout the fall of 2023 as inflation continued to decline. Looking ahead, economists widely anticipate a shift towards interest rate cuts once there is more confidence that inflation is moving towards the target of two per cent. The Canadian economy has cooled significantly, providing reassurance to the central bank that the economy is no longer overheated. Governor Tiff Macklem has signaled that evidence of sustainable progress toward the two per cent inflation target will be the key factor in considering interest rate cuts, rather than a strict requirement for inflation to hit the target. This year is expected to revolve around when inflation reaches a level that prompts the Bank of Canada to reduce interest rates from their current high levels.