Canada's December Inflation Dashes Hopes Of An Early Rate Cut

• The annual inflation rate in Canada for December met predictions, increasing to 3.4% from the previous month's 3.1%. This data indicated a persistent upward trend in prices.
• Key indicators of underlying inflation, such as CPI-trim and CPI-median, showed acceleration. The three-month annualised rate for these measures rose to 3.6%, up from the prior month's revised 2.9%. This suggested that inflationary pressures were not merely transient but had a more lasting impact.
• With the rise in inflation, hopes for an early shift in the central bank's stance towards rate cuts were disappointed. Royce Mendes of Desjardins Group expressed disappointment, emphasising the "stickiness" in core inflation measures, which suggested that conditions were not conducive to opening the door for rate cuts.
• The Bank of Canada (BoC) had previously raised its key policy rate to 5.0% between March 2022 and July 2023 to combat inflation. However, the latest data has altered market expectations. While the chance of rate cuts in March decreased after the release, there is still a significant expectation of a 25-basis-point reduction in April.
• The surge in headline inflation was attributed to higher gasoline prices, airfares, fuel oil, passenger vehicles, and rent. Notably, food purchases from stores rose by 4.7%. Andrew Kelvin of TD Securities highlighted that the acceleration in core inflation underscored the need for the BoC to exercise caution before considering any loosening of monetary policy.
• The Bank of Canada had initially forecasted inflation to reach its target by the end of 2025; however, Governor Tiff Macklem indicated a more optimistic outlook, expecting it to be closer to the target by the end of the current year.

(Source: Reuters)