Quick Take

COVID-19 restrictions weigh on December inflation

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Top of a roller coaster track

The Conference Board of Canada’s economist Anna Feng offers the following insights on today's release of the Consumer Price Index (CPI):

Inflation decelerated to 0.7 per cent in December. In all, price inflation was only 0.7 per cent in 2020, the smallest increase since 2009. Tightened restrictions across regions in December significantly weighed on consumer demand for transportation, thus pulling down consumer prices. Despite the recent dip in inflation due to stricter public health measures, we remain optimistic that pent-up consumer demand and rising business costs will put upward pressure on inflation in 2021.

  • Inflation edged up 0.7 per cent on a year-over-year basis in December, down from 1.0 per cent growth in November.
  • High COVID-19 case loads across the country and public health measures weakened consumer demand for transport services, which weighed heavily on their prices. In particular, prices for air transportation (-14.5 per cent), inter-city transportation (-14.0 per cent), as well as public transportation (-9.2 per cent) logged their largest drops since last August.
  • Gasoline prices continued to recover in December, sitting only 8.5 per cent lower than last December. While oil demand plunged again as economic activities slowed during the second wave of the coronavirus globally, Saudi Arabia’s recent oil cuts are expected to support the recovery of oil prices. Excluding gasoline, inflation inched up 1.0 per cent in December.
  • Growth in food prices slowed to 0.5 per cent in December, its lowest year-over-year increase since August 2018. Improved weather conditions in the United States and Mexico supported a strong harvest and thus boosted food supply.
  • Increased supplies of fresh fruit and vegetables contributed to the slow down in food prices last month. Notably, the price of tomatoes finally cooled off after 11-months of double-digit growth, but its annual growth rate (+27.4 per cent) still topped the chart last year.
  • The average of Bank of Canada’s core inflation slipped back to 1.6 per cent, coming on the heels of four-consecutive months of 1.7 per cent growth. Growth in CPI-common fell to 1.3 per cent, its slowest growth rate since July 2020.
  • Overall, the 0.7 per cent increase in the consumer price index was its slowest annual growth rate since 2009. Tepid inflation last year reflected severe disruptions to consumer spending due to physical distancing orders and travel restrictions during the pandemic.
  • Going into 2021, we expect that inflation will continue to recover, supported by pent-up demand and the anticipated rebound in economic activities, especially in the second half of this year.

COVID-19: Get all the insights

Anna Feng

Anna Feng

Economist

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