Quick take

Towering inflation in November casts a shadow on recovery

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  • In November, the Consumer Price Index (CPI) rose by 4.7 per cent (y/y), matching October’s increase. This figure also met the consensus forecast of 4.7 per cent.
  • Gasoline prices fell by 0.1 per cent (m/m) but were 43.6 per cent higher than a year ago. Year-over-year food prices also increased, both in stores (+4.7 per cent) and restaurants (+3.8 per cent).
  • Excluding food and energy, the CPI climbed by 3.1 per cent in October. Prices rose in all eight major CPI components, with transportation (+10.0 per cent) and shelter (+4.8 per cent) prices surging.
  • On a seasonally adjusted monthly basis, the CPI went up 0.3 per cent in November—down from 0.5 per cent in October.
  • The average of the Bank of Canada’s three core inflation measures remained at 2.7 per cent in November. CPI-trim remained at 3.4 per cent, CPI-median sat at 2.8 per cent, and CPI-common posted a slight increase to 2.0 per cent.

Key insights:

  • November’s inflation figures may have been expected, but that doesn’t make them easier to digest. Prices rose across all major CPI categories. Supply chain disruptions remain one of the key drivers of price growth. Still, there is no denying that government spending has played a role in fuelling demand. Fiscal discipline is warranted in keeping higher prices at bay.
  • We see many risks to inflation in the coming months. Supply chain capacity will gradually improve, but this will take time. The Omicron variant remains a wild card and may exacerbate inflationary pressures if it adds to supply-side problems. Canadian households are also holding onto substantial savings and continue to save more than before the pandemic. If these savings are spent faster than expected, higher demand will further outstrip limited supply and push inflation higher.
  • The Bank of Canada’s mandate to target inflation at 2 per cent was renewed earlier this week. But the Bank will also “actively seek the maximum sustainable level of employment when conditions warrant.” While the main goal of the Bank is still to keep inflation stable within the 1 to 3 per cent range, the new language indicates that the Bank may be more comfortable with higher inflation than it has been in the past. We’re keeping a close eye on inflation expectations which are on the rise. According to our latest Index of Business Confidence, more than 50 per cent of respondents said they expect inflation to be 5 per cent or greater six months from now. Still, the output gap is far from closed. We expect the Bank to wait until April to first raise rates, followed by two more hikes in June and September.

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Kiefer Van Mulligen

Kiefer Van Mulligen

Economist

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