Canadian Inflation and Business Outlook Survey Suggests Economic Softening
On Tuesday, the final consumer price index report for 2024 will be released, attracting significant attention as analysts look for further indicators of easing price pressures in Canada. However, the report might present misleading data due to the GST holiday that commenced on December 14. This holiday applied to various consumer products, including some groceries, toys, and meals at restaurants.
We anticipate that headline inflation will decrease slightly in December, falling to 1.5% from the previous rate of 1.9% year-over-year. This expected decline mainly stems from a slowdown in the growth of food prices, which should offset any increase in energy costs. When excluding these two fluctuating components, we predict that core inflation will remain stable at 1.9%.
The Bank of Canada focuses on specific core measures that adjust price data to eliminate the effects of indirect taxes. This adjustment provides a clearer view of inflation trends. We forecast that both the trim and median core measures will stay around 2.5%, reflecting a weakening economy that continues to impact domestic price levels.
Mortgage interest expenses significantly influence total CPI growth and also affect core measures. However, these costs are expected to continue declining with a delay following the Bank of Canada’s interest rate cuts implemented last year. Based on our analysis, year-over-year growth in the median and trim measures would have been approximately 0.5% lower on average in November (2.2% and 2.1%, respectively) had mortgage interest costs been excluded.
Additionally, the Bank of Canada will release its Business Outlook Survey for the fourth quarter on Monday. We believe that inflation expectations will likely continue to moderate, given that readings have remained close to the central bank’s target of 2% for four consecutive months. As job openings diminish—indicating reduced hiring demand—expected wage growth should also decline further. The Bank of Canada will closely monitor potential decreases in significant capacity pressures, such as labor shortages and supply chain issues, as these could indicate a deeper economic downturn, a wider output gap, and growing disinflationary risks.
Upcoming Economic Data
Looking ahead, we expect Canadian retail sales to remain steady in November, as indicated by Statistics Canada’s advance estimates. Seasonally adjusted auto sales are projected to have surged by 8%, and sales at gas stations likely rebounded in November in response to rising prices. Nonetheless, sluggish core sales are expected to offset this growth.
Overall, market participants will be looking closely at these developments, as they could provide insights into the direction of Canada's economic recovery and inflation trends moving forward.
inflation, economy, survey