Invezz - Statistics Canada released the Consumer Price Index (CPI) for the month of November 2023, which increased by 3.1% YoY, and remained unchanged since October 2023.
Markets were initially surprised by the reading that was higher than estimates of 2.9% YoY, dissipating market optimism that the CPI may break below the 2023 low of 2.8% YoY recorded in June 2023.
The key contributors were mortgage costs which rose nearly 30% since the corresponding month last year, as well as from recreation, education and reading activities which were up 3.8% YoY.
Energy eased from 5.7% YoY to 5.4% YoY, while food inflation moderate from 5.6% YoY in the previous report to 5.0% YoY.
Prices of store bought food moderated from 5.4% YoY in October to 4.7% YoY.
On a monthly basis, consumer inflation remained steady at 0.1%, well above the expected decline of (-)0.2% MoM.
In September 2023, the monthly CPI had registered a decline of (-)0.1% MoM.
On an annual basis, core inflation (which excludes volatile components including food, energy, and mortgage costs) accelerated by 2.8% YoY as compared to October 2023 data of 2.7% YoY, and marks the first increase since August 2023.
Market expectations were that the core CPI would slow considerably to 2.5% YoY, and has pushed higher above the Bank of Canada’s (BOC) 2.0% target.
On a monthly basis, core CPI moderated to 0.1%, as against the 0.3% MoM change in the previous report.
Statistics Canada also provides CPI Median YoY and CPI Trimmed-Mean YoY which registered an increase of 3.4% YoY and 3.5% YoY, respectively.
These were both unchanged from their respective data points in October 2023, but were above expectations of 3.3% YoY and 3.2% YoY, respectively.
The CPI Trimmed-mean YoY is an indicator which strips out 40% of the consumer basket that experienced the most extreme price changes during a particular month, thus filtering out any unforeseen or severe factors.
Producer Prices
Along with the CPI, the Statistics Canada also released data on the Producer Price Index (PPI).
Contrary to the CPI, the PPI experience deflation on an annualized and monthly basis, sinking (-)2.3% and (-)0.4%, respectively.
As per forecasts by analysts at TradingEconomics.com, PPI was forecast at (-)1% YoY and 0.7% MoM.
On an annualized basis, this marked the seventh deflation during the year, following an increase of 0.6% YoY in the previous report.
That was the second consecutive month of producer deflation, driven by lower energy costs, and declining chemicals and chemical products.
On a monthly basis, this marked the second consecutive decline after falling (-)0.9% MoM in October 2023.
The only two positive monthly increases for 2023 were recorded in August and September at 1.9% MoM and 0.4% MoM.
Monetary policy
Although expectations were that policy rate lags are yet to have their full effect, the latest CPI and especially the strengthening core CPI was certainly a surprise to markets.
Yet, the inflation data is still within the BOC’s estimates that the CPI will remain around 3.5% YoY until the middle of 2024.
Even as global central banks have switched their narratives to monetary easing and are expected to cut rates in 2024 amid slowing inflation, the latest data may indicate that the BoC may need to maintain higher rates for longer.
As a result, markets will closely be watching inflation data for December 2023.
With a strong CPI reading coupled with expectations of the Fed lowering rates in 2024, the USD/CAD which was trading around 1.338 levels prior to the release, has dived to 1.3354, and at the time of writing, is trading at (-)0.31% compared to yesterday’s close of 1.3401.
Later this week, markets will be closely watching US PCE data and Canadian GDP which is due on Friday.