Canada’s annual inflation rate unexpectedly slowed by a tick to 1.9 per cent in November, driven by a broad-based slowdown in prices, and the consumer price index was unchanged on a monthly basis. Analysts polled by Reuters had expected that inflation would hold steady at the 2 per cent rate recorded in October and the consumer price index would rise 0.1 per cent month-over-month. The Canadian central bank’s preferred measures of core inflation, CPI-median and CPI-trim, were unchanged, though previous month’s data were revised up by a notch.
Markets barely budged on the latest data that were released at 830 am ET. The Canadian dollar (CADUSD) initially hovered in just above the 70 cents US mark, but it broke through the support level as the morning wore on and by noon was at 5-year lows at 69.82 cents. It is very close now to trading at its weakest levels since 2003. A strong greenback in the wake of a better-than-expected U.S. retail sales report this morning is contributing to the loonie’s weakness.
Canada’s 2-year bond yield following the data was up nearly 2 basis points to 3.046 per cent, well within its range of the morning, and in sync with its U.S. counterpart. (Yields turned lower later in the morning, however, alongside the further weakness in the Canadian dollar).
Implied probabilities of future rate moves in swap markets haven’t changed either in the wake of the inflation report. They suggest about 54 per cent odds of a quarter point cut at the Jan. 29 Bank of Canada policy meeting, and about 46 per cent odds of no rate move at all. Markets are currently only pricing in a total of 50 basis points of more cuts through the course of next year.
Tuesday’s data was the first of two inflation reports that the Bank of Canada will get to assess before the bank’s next rate decision. The central bank, tasked with keeping inflation under control, has cut interest rates by 50 basis points at each of its last two policy announcements to bring the cumulative reduction in borrowing costs to 175 bps since June.
Here’s how implied probabilities of future interest rate moves stood in swaps markets moments after the inflation report, according to LSEG data. The overnight rate now resides at 3.25 per cent. While the bank moves in quarter-point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
The second table to the bottom is a breakdown of probabilities for the size of a cut on Jan 29.
And here’s what they looked like just prior to the 830 am ET data:
Here’s how economists and market strategists are reacting in written commentaries:
Douglas Porter, chief economist, BMO Capital Markets
While the Bank of Canada will welcome the renewed dip below 2% for headline inflation, they would prefer that the sticky core trends stayed away this holiday season. Note that the Bank’s October MPR forecast for core inflation was an average of 2.3% for Q4—instead, it’s tracking at 2.65%, a notable miss. The deepening sag in the Canadian dollar is not going to help. In a nutshell, this report reinforces the point that the Bank will now turn to a more gradual path for rate cuts as we head into 2025. While we expect a further trim on January 29, another meaty set of core readings next month will prompt some chattering about a pause, especially with the Fed seemingly headed that way in January and the loonie on the ropes.
Thomas Ryan, North America economist, Capital Economics
The surprise fall in headline inflation back below the 2.0% target in November reflected steep price falls in a handful of components related to consumer goods, driven by Black Friday discounts, which should reverse this month. More concerningly, the above-target monthly rises in CPI-trim and CPI-median, which excluded those large movements, still suggest that underlying inflationary pressures are building. While this at the margin raises the chance for a pause at the Bank’s next meeting in January, we continue to forecast a 25bp cut. ...
The Bank will probably choose to look through the decline in headline inflation, given it was supported by temporary factors. It cannot do the same, however, for the second consecutive strong 0.3% m/m gains the CPI-trim and CPI-median measures, given they excluded the large price falls in the consumer goods-related components (and the jump in travel services). The 3-month annualised rate for the average of the two is now at 3.3%, above the upper limit of the Bank’s 1% to 3% target range. We do not think this is enough for the Bank to call time on its easing cycle but, paired with the recent pick-up in some of the activity data, it confirms that the Bank will start moving in smaller 25bp increments and raises the chance of a pause at the meeting next month.
Royce Mendes, managing director and head of macro strategy, Desjardins
Given the seasonal element in those price declines, the Bank of Canada would typically look to its preferred core measures of inflation to guide upcoming monetary policy decisions. However, these measures provided conflicting signals in November. Both core-median and trimmed mean rose 0.3%, which pushed the average of the three-month annualized rates up to 3.3% from an upwardly revised 2.9% in October. 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. 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.
Excluding shelter, core-median and trimmed mean were both up just 0.2%, with the average of the three-month annualized rates tracking 2.4%. While that suggests that there’s no reason for the Bank of Canada to panic, the three-month annualized rate of core services excluding shelter also remained at 3.3%. As a result, the Bank of Canada’s guidance for more gradual rate cuts in 2025 remains intact.
We continue to expect that the central bank will cut rates another 25 basis points in January, but we anticipate a pause in March. Our mid-year and end of year forecasts of 2.75% and 2.25% remain unchanged for 2025, given that the disinflationary pressures from mortgage renewals and slower population growth are likely to weigh on prices next year.
Derek Holt, vice-president and head of Capital Markets Economics, Scotiabank
Key is that the BoC’s two preferred core inflation readings were hot again. And no, neither mortgage interest’s inclusion in one of those measures or Taylor Swift are to blame. Trimmed mean CPI was up 3.5% m/m at a seasonally adjusted and annualized rate (SAAR). Weighted median CPI was up by 4% m/m SAAR. Together, the average was up by 3¾% m/m SAAR. That’s still too hot. The three-month moving averages of these measures now stands at 3.5% m/m SAAR for both. They are accelerating, not just as one-offs, but as a trend over recent months. What used to be the BoC’s preferred core gauge—excluding only food and energy—was much soft and so were the CPIX and CPI-ex-8 measures.
Using the BoC’s preferred measures shows that core inflationary pressures remain well above the BoC’s 2% target at the margin and this is important. It’s why you should ignore the headline y/y CPI reading of 1.9% y/y that was lighter than consensus but stronger than I had estimated. Developments in core inflation ultimately guide headline inflation in terms of what monetary policy stands the best chance at controlling by way of price pressures and those price pressures have to be evaluated in higher frequency m/m terms at the margin.
Matthieu Arseneau and Ethan Currie, economists with National Bank
November’s inflation data were mixed. On the one hand, headline inflation was lower than expected, slightly below the Bank of Canada’s target at 1.9%. On the other hand, the two core inflation measures favoured by the central bank were higher than consensus expectations, both posting month-on-month increases of 0.3%. As a result, over three months, CPI-Median is evolving at an annualized rate of 3.2% and CPI-Trim at a rate of 3.3%. Does this mean that the Bank of Canada is already regretting last week’s significant accommodation? Not so fast. We have shown in the past that these core inflation measures can be biased by the evolution of certain components, and that we also need to look at diffusion indicators that the central bank monitors regularly. In doing so, we note that over three months, only 24 components over 55 are moving above 2.0%, a proportion that is still below the prepandemic historical average. Over the past year, only 18 components have risen above the Bank of Canada’s target, the first time this has happened in 52 months and a very low proportion on a historical basis. All in all, we reiterate our view that excessive inflation should no longer be a concern for the central bank. Wage inflation remains too high, but this is mainly due to public sector employees who continue to demand compensation for past losses in purchasing power. In contrast, compensation growth in the private sector is back to normal due to the much-cooled labour market. The sharply increasing unemployment rate could continue to rise if the various leading indicators (hiring intentions, vacancy rates, falling profits) are anything to go by. For these reasons, the central bank must continue to put in place the conditions for a soft landing in 2025 by continuing to ease monetary policy in the months to come.
Jules boudreau, senior economist at Mackenzie Investments
November CPI data shows, once again, that inflation can’t survive to a depressed economy. With the last few reports, evidence has progressively strengthened that Canada is back to a sustainable 2% inflation environment. However, this is not an unambiguously positive report for inflation, even if the headline numbers show stable overall prices in the month of November.
Inflation came in slightly below economists’ expectations on a monthly basis, at +0.0% unadjusted, and +0.1% seasonally annualized. Some temporary price shocks could be clouding the numbers, but they are pointing in opposite directions: the Taylor Swift concerts lead to spikes in travel accommodation prices, while slightly-higher-than-usual Black Friday discounting weighed on clothing prices. Their reversals should cancel out in December.
One worrying sign for the Bank of Canada is a slight acceleration in rent prices, after a promising slowdown in the October report. Plus, food prices are still rising at a pace slightly above the pre-Covid trend, even if they have stabilized in 2024. Finally, the Bank’s preferred measures of core inflation rose at a ~3.5% monthly pace in November. Slowing mortgage interest costs are doing the heavy lifting in the deceleration of inflation. Excluding those costs gives a more nuanced portrait.
In general, this ambiguously good inflation print does support the Bank of Canada shifting to a 0.25% per meeting pace in January.
Tu Nguyen, economist with assurance, tax & consultancy firm RSM Canada
Inflation has gotten under control, with the headline number falling slightly to 1.9% and disinflation observed across categories. We expect a 25 basis point cut in January given that price stability is essentially restored.
Since mortgage interest payments remain the largest contributor to the deceleration the consumer price index, more disinflation is expected with further rate cuts. The biggest risk to inflation lies in trade policy uncertainty that comes with the Trump administration.
Looking ahead, it’s unclear whether the inflationary or disinflationary effects of the slowdown in immigration in 2025 will be stronger. While it will reduce the pressure on housing, less immigration also means a lower labour supply, which could push up wages and eventually consumer prices.
Leslie Preston, managing director and senior economist, TD Economics
November’s inflation data came in line with the Bank of Canada’s expectations for inflation to average close to 2% over the next couple of years. Headline was only a tenth cooler than expected, but this was mitigated by a lack of progress in the Bank of Canada’s Core inflation measures.
Our forecast calls for headline inflation to rise somewhat above the Bank’s 2% target next year as likely tariffs raise goods costs. However, we don’t expect that this is high enough to dissuade the BoC from cutting interest rates further. With an America-First agenda south of the border, Canada’s economy faces a challenging backdrop, and lower interest rates are required for support. That said, at 3.25% on the overnight rate, we are now at the edge of “neutral” territory, further cuts are expected to come at a more measured pace next year.
Nick Rees, Senior FX Market Analyst, Monex Canada
Canadian inflation undershot expectations in November, falling from 2.0% to 1.9% YoY. Despite this, there is enough support in today’s data for the BoC to validate a step down in the pace of easing announced earlier this month, with the BoC’s preferred measures of underlying inflation remaining sticky, and above 2.0%. Accordingly, we continue to expect caution in the short term from the Governing Council, suggesting a 25bp cut to rates in January as the most likely next step. But, the longer run path for both rates and inflation should to be determined primarily by Trump tariffs, or lack thereof, later in the new year.
David Rosenberg, founder of Rosenberg Research
Strip out the shelter component, and Canadian inflation is running at just +0.8% on a YoY basis (was +1.9% a year ago). The YoY trajectory in the ex-mortgage cost index (95% of the pricing pie) is down to +1.3% from +2.2% a year back. These metrics allow the BoC to sustain its easing stance even if it starts to go in 25 (as opposed to 50) basis point increments.
Andrew Grantham, senior economist with CIBC World Markets
It will be difficult for policymakers to determine the underlying trend in inflation over the next few months, with December figures weakened by the mid-month start of a GST holiday on certain goods/services. The reinstating of GST in mid-February will then temporarily boost CPI readings. While the CPI-Trim and Median measures should be less impacted by such temporary factors, throughout this period the Bank’s assessment of slack in the economy, including how it views upcoming employment data, should become even more important in determining policy decisions. We continue to forecast a 25bp cut from the Bank at the January meeting.
Claire Fan, economist, Royal Bank of Canada
We expect a softening economy (falling per-capita GDP and rising unemployment) will keep pressing down on domestic price pressures going forward. The Bank of Canada cut the overnight rate by 50 bps as expected last week but signalled clearly that further reductions would be more gradual. That’s in line with our outlook, that expects consecutive smaller 25 basis point cuts to the overnight rate down to 2% (below the BoC’s 2.25% to 3.25% estimated neutral range) by July 2025.
Charles St-Arnaud, chief economist, Alberta Central credit union
Overall, nothing in today’s report could suggest the BoC would change course and stop its easing cycle. With inflation in line with the inflation target, it is unlikely to be the BoC’s main worry at this point. Nevertheless, the stickiness of the BoC core measures will require close monitoring. The BoC’s focus remains primarily on the downside risks to growth. ... Llower population growth next year will be a major drag on the economy, pushing potential growth and the neutral rate lower. With this in mind, we expect the BoC to ease by 25bp at the January meeting and to bring its policy rate to 2.0% in 2025, implying a 125bp reduction over the course of the year, as long as inflation remains consistent with the BoC’s target.
Bryan Yu, chief economist, Central 1 credit union
Broadly, the latest numbers show well contained inflation. Various cuts of data suggest underlying patterns are mild. Excluding food and energy, inflation is bang on 2.0 per cent, and all items excluding the still elevated shelter component is 0.8 per cent. Shelter continues to dominate the overall inflation reading. Bank of Canada core measures are still a touch high but stable with the median at 2.6 per cent and trim measure at 2.7 per cent, although the three-month trend of both measures sits closer to 3.0 per cent. Among provinces, only B.C. (2.3 per cent) and Alberta (2.8 per cent) exceeded 2.0 per cent inflation.
November’s steady reading will have negligible impact on the next Bank of Canada rate decision given another cycle of economic and inflation to be released beforehand. That said, the results are in line with the Bank’s expectation that 2 per cent inflation will be maintained and we should expect more rate cuts over the next two quarters as it moves towards the lower end of its neutral rate estimate. The Bank will look through the impacts of the GST holiday which will temporarily lower inflation. There remains downside risk to inflation due to uncertainty from potential U.S. tariff policy, which could have severe repercussions for the Canadian economic growth if enacted.
David Doyle, head of economics at Macquarie
There were mixed signals in Canada’s inflation data for November. The average of trim/median was +0.31% MoM, the second consecutive firm reading. YoY, the average firmed to +2.65%. These figures, however, were boosted by a strong impulse from gasoline and several food categories. Traditional core (ex food and energy) was more subdued at +0.1% MoM and +1.9% YoY.
This will be the last “clean” reading for CPI for the next four months as the GST/HST temporary tax relief from the federal government will impact data for December through March. Overall, in the first half of 2025 we suspect inflation data to be subdued in Canada given the size of the output gap and the deflationary impact that the immigration U-turn will have on shelter costs. We continue to anticipate four consecutive 25 bps cuts from the BoC in the first half of next year with the policy rate falling to 2.25%.