Canadian inflation eased in December on sharply lower airline tickets and ample grocery supplies, capping the weakest year for growth since 2009.
The consumer price index (CPI) rose 0.7 per cent in December from a year earlier, down from 1-per-cent growth in November, Statistics Canada said Wednesday. The average of the Bank of Canada’s core measures of inflation – which filter out short-term volatility in price changes – fell 10 basis points to 1.57 per cent. (There are 100 basis points in a percentage point.)
On an average annual basis, CPI edged higher by 0.7 per cent in 2020, following a 1.9-per-cent climb in 2019. The deceleration, Statscan said, was “mostly attributable” to lower consumer spending related to the COVID-19 pandemic and various health restrictions.
Inflation will be a key economic theme for 2021, particularly as it accelerates to the Bank of Canada’s 2-per-cent target in the coming months, as most economists expect. However, that strengthening will be driven by base effects from when COVID-19 first struck and walloped everything from gasoline prices to hotel costs, and could prove temporary.
“As a result, the Bank of Canada will continue focusing on supporting the recovery until slack has been absorbed such that inflation is sustainably running at 2 per cent, something we don’t expect to see until 2023,” Royce Mendes, senior economist at CIBC Capital Markets, said in a note to clients.
In December’s report, six of eight major components increased on a year-over-year basis, led by a 2-per-cent gain in recreation, education and reading. There was a notable 1.6-per-cent rise in shelter costs. In particular, the homeowners’ replacement cost index – which is tied to the price of new homes – rose 5.5 per cent, feeding into the overall gain.
“Historically low interest rates coupled with a shift in buyer preferences toward larger homes continued to fuel demand for single-family homes,” Statscan said. “The increase in demand combined with higher building material costs and low inventory of homes for sale in some markets contributed to higher prices for new housing.”
At the other end, CPI for clothing and footwear fell 3.4 per cent from a year ago, the weakest performance for a major component. Retail sales of apparel have been slammed by a pandemic that’s kept consumers largely housebound for the past 10 months.
Food prices fell 0.2 per cent in December, slowing the 12-month growth to 1.1 per cent from November’s 1.9 per cent. Statscan tied the weaker pace to favourable weather conditions in the United States and Mexico that increased the supply of fresh fruit and vegetables, along with redirected supply from restaurants to retail outlets.
Year over year, the transportation component edged down by 0.6 per cent. In particular, air transportation prices fell 14.5 per cent on lower demand, Statscan said. “The typical seasonal demand for air travel during the holiday season was significantly reduced in December.”
Gasoline prices increased 3.3 per cent from November, the first monthly increase since the summer, as major oil-producing countries cut output to lift crude prices. Still, gas prices were down 8.5 per cent from December, 2019.
The coming months will see a pick-up in inflation. Stephen Brown, senior Canada economist at Capital Economics, said a “surge” in energy costs will push annual CPI to around 2 per cent in March and 3 per cent in April.
“We already know that a spike in inflation is coming, due to the sharp falls in prices during the first lockdown,” he wrote to clients.
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