Shoppers walk through Toronto's Eaton Centre mall in November. Statscan's latest inflation report noted that Black Friday sales contributed to lower prices for furniture, footwear and clothing.Chris Young/The Canadian Press
Canada’s inflation rate dipped below the Bank of Canada’s 2-per-cent target for the second time in three months, the latest sign that central bankers have tamed inflationary pressures in the economy.
The Consumer Price Index rose at an annual rate of 1.9 per cent in November, down from 2 per cent in October, Statistics Canada said Tuesday in a report. Financial analysts were expecting consumer price inflation to hold steady.
On a monthly basis, the CPI was unchanged in November from October, versus expectations of a 0.1-per-cent increase.
Inflation has eased to more typical rates this year, owing to higher interest rates that have curbed demand, improvements in supply chains and a sluggish economy. The annual inflation rate has spent all of 2024 below 3 per cent.
This progress has allowed the Bank of Canada to cut its policy rate at five consecutive meetings since June, and most recently by half a percentage point last week.
But the path for inflation and interest rates is highly uncertain. Bank of Canada Governor Tiff Macklem said last week that the central bank will be taking a “gradual approach” to monetary policy going forward, suggesting that additional big rate cuts are off the table.
‘We need a richer playbook’: Tiff Macklem on kicking inflation, tariffs and uncertainty ahead
Moreover, the Canadian economy is facing the prospect of hefty U.S. tariffs from the incoming Trump administration, with potential retaliation that would raise prices on U.S imports.
“With an America-first agenda south of the border, Canada’s economy faces a challenging backdrop, and lower interest rates are required for support,” Leslie Preston, senior economist at Toronto-Dominion Bank, said in a client note.
Investors were pricing in a 63-per-cent chance the Bank of Canada will cut its benchmark interest rate – now at 3.25 per cent – by a quarter-percentage point at its next announcement on Jan. 29, according to Bloomberg data as of Tuesday afternoon. Traders were pricing in just two quarter-point cuts by next summer, although this could easily change.
Reaction and analysis on the November inflation report
Hours before the inflation report was released, the Canadian dollar slipped below 70 U.S. cents on Tuesday, the first time it has broken through that barrier since the early weeks of the COVID-19 pandemic. This will put upward pressure on import prices, but should help Canada’s export-focused companies.
The two-month GST/HST holiday for some products, which went into effect on Dec. 14, should temporarily drive inflation lower. The Bank of Canada said last week that inflation could ebb to around 1.5 per cent in January, but the impact will unwind after the tax break ends in mid-February.
The Statistics Canada report showed price pressures were subsiding on several fronts. The agency noted that Black Friday sales contributed to lower prices for furniture, footwear and clothing. Prices for cellphone plans fell 6.1 per cent in November from October.
Hotel prices in Ontario jumped by 11 per cent, the “swiftest monthly increase ever recorded for the month of November, coinciding with a series of high-profile concerts,” a nod to Taylor Swift’s sold-out shows in Toronto last month.
Mortgage interest costs rose 13.2 per cent, year-over-year, but that’s way down from peak increases of roughly 30 per cent last year. The Bank of Canada’s rate cuts are easing some pressure on debt-carrying homeowners.
Rents, meanwhile, rose by an annual 7.7 per cent, accelerating from October’s 7.3-per-cent gain. However, data from rental listing websites suggest asking rents are on the decline in many cities.
Core measures of inflation – which strip out volatile movements in the CPI – offered a mixed picture.
On a three-month annualized basis, the Bank of Canada’s preferred measures of core inflation rose by 3.2 per cent and 3.3 per cent, respectively, heating up considerably over the past two months.
“That said, the increase in those measures partially reflects the inclusion of mortgage-interest costs in the calculation in November, a category which had previously been excluded,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a note to clients.
“Given that mortgage-interest cost inflation has decelerated and will likely continue to do so now that the Bank of Canada has conducted a number of rate cuts, central bankers might want to look through that strength in their preferred measures.”
Canada is facing a fraught economic environment, with U.S. president-elect Donald Trump vowing to impose a 25-per-cent tariff on imports from Canada upon his return to the White House. In an interview with The Globe last week, Mr. Macklem said the effect of tariffs on Canadian monetary policy would depend on their size, their breadth and Canada’s response.
“It is a complicated shock for monetary policy, because it’s what we call a negative supply shock. It’s going to hurt GDP growth. And particularly if there are retaliatory tariffs, that means imports from the United States to Canada would become more expensive,” Mr. Macklem said.
With a report from Mark Rendell.