Market Wire - Canadian Price Growth Hits Three Decade High, Lifting Odds on January Rate Hike
Karl Schamotta - Chief Market Strategist
Canadian prices rose at the fastest annual rate since 1991 last month, but markets were well prepared, and interest rate expectations rose very modestly across the curve. Data released by Statistics Canada this morning showed the Consumer Price Index climbed 4.8 percent on a year-over-year basis in December, with falling energy prices pulling the month-over-month change down to -0.1 percent - broadly meeting consensus economic forecasts. The Canadian dollar nudged slightly higher, holding onto gains achieved earlier in the week.
Goods prices led the increase: On a year-over-year basis, products meant to last for more than three years became 5.7 percent more expensive, semi-durable goods prices rose 1.7 percent, and non-durables leapt 8.5 percent - while services saw a more modest 3.4 percent increase. But evidence of a rotation in consumer spending began to appear in the month-over-month data, with tangible product prices down 0.7 percent, while services moved 0.4 percent higher.
Housing costs played an important role: The homeowners' replacement cost index – a proxy for new home prices – was up 13.6 percent over the prior year. The other owned accommodation expenses index, which includes commission fees on the sale of real estate, gained 13.4 percent, and mortgage interest costs were down -7.6 percent over the same period.
Energy prices fell: Gasoline prices fell -0.3 percent month-over-month, reflecting December’s weakness in global oil benchmarks and the onset of the Omicron coronavirus variant.
With volatile components extracted, price growth was more restrained: Core inflation, computed as the average of the three price measures preferred by the Bank of Canada (trim, median, and common), increased an annualized 2.93 percent. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.
And workers lost out: With hourly earnings rising 2.6 percent on a composition- and tenure-adjusted basis, Statistics Canada said “Canadians experienced a decline in purchasing power” last year.
Long-term expectations remain well-anchored: According to the Bank of Canada’s Survey of Consumer Expectations, published Monday, Canadians see price growth running hot over the next two years, before subsiding as the pandemic’s impact fades. Wages are not expected to move significantly higher - suggesting that the likelihood of a wage-price spiral remains low.
A rate increase could come next week: Markets are assigning nearly 75 percent odds to a hike at the Bank of Canada’s January meeting, with as many as five additional moves expected over the course of the year. Job markets are almost fully recovered, exports are growing at a solid pace, and inflation has exceeded the Bank’s target range for nine consecutive months.