Inflation Rate Slows To 1.9% In November

To understand where the CPI is today, here’s a look at the year-over-year percentage changes since it hit a 39-year high of 8.1% in June 2022:

Inflation remains within the BoC’s 2% target window. So how does this latest report affect what’s left in our bank accounts at the end of the month? Let’s look at what’s happening with the three biggest contributors to Canada’s inflation rate: shelter, transportation and food.

Shelter is the most important component of the CPI, representing 30% of its inflation basket. The index covers both rental and owned accommodations. Rental costs track the amount paid by a tenant month-over-month. In contrast, owned accommodation costs track several components, including mortgage interest rate costs, property taxes, home and mortgage insurance, and maintenance and repairs.  

Historically, higher costs for mortgages and rent have put sustained upward pressure on inflation and still keep headline inflation elevated. According to this latest release, however, shelter price growth continued to ease in November, rising 4.6% year-over-year, compared to 4.8% in October and 5.0% in September. “Excluding shelter, inflation remains very mild at just 0.8% year-over-year,” notes BMO’s Porter.

Mortgage interest costs (MIC) slowed to 13.2% in November,  compared to 14.7% the previous month. MIC have been decelerating year-over-year since September 2023, following a 30.9% peak in August 2023. 

“Growth in mortgage interest cost (at 13.2% year-over-year in November) continues to account for a large share of remaining price pressures,” notes Claire Fan, Economist, Royal Bank of Canada. “It should, however, continue to moderate following interest rate cuts.”

Rent accelerated in November, rising 7.7% year-over-year after a 7.3% gain in October; the most significant price growth was noted in Ontario (+7.4%), Manitoba (+7.9%) and Nova Scotia (+6.4%).MIC and rent indices contributed the most to the 12-month all-items CPI increase in November, as noted by StatCan.

Gasoline prices fell only 0.5% year-over-year this month, compared to  4.0% in October and 10.7% in September, largely due to a base-year effect as prices fell 3.5% month-over-month in November 2023. On a monthly basis, gas prices were unchanged in November. 

Here’s how the year-over-year gasoline prices have tracked over the past nine months:

November 2024: -0.5%
October 2024: -4.0%
September 2024: -10.7%
August 2024: -5.1%
July 2024: +1.9%
June 2024: +0.4%
May 2024: +5.6%
April 2024: +6.1%
March 2024: +4.5%

Gas prices are up 7.7 cents from last year’s average of 141.0. cents per litre, according to price tracker GasBuddy.com, with Canadians paying an average of 148.7 cents per litre. The average price at the pump is largely unchanged, up 0.4 cents from last month’s average of 148.3 cents per litre.

Food inflation remains elevated, with prices slightly softer in November (+2.8%) compared to 3.0% in October. Food purchased from grocery stores rose 2.6% year-over-year in November, down one tick from October (2.7%) but still uncomfortably high; compared with November 2021, grocery prices rose 19.6%, noted StatCan.   

The BoC has an inflation target of 2%, with inflation measured as the 12-month rate of change in the consumer price index. The Bank uses this indicator to influence short-term interest rates by adjusting its target for the overnight rate on eight fixed dates each year. Commercial banks, in turn, use the overnight rate to set their prime rate. As the inflation figure trends upwards, the Bank raises rates to cool an overheated economy. 

Between April 2022 and June 2024, the BoC hiked its overnight rate 10 times by 475 basis points to a 22-year high of 5%. Interest rate changes affect the economy in four primary channels:

• Commercial interest rates, namely what you pay on mortgages and loans and what you receive on deposits, such as high-interest savings accounts 
• The Canadian dollar exchange rate
• Canadians’ expectations for inflation
• The price of assets such as houses, stocks and bonds

However, in June 2024, the BoC cut its key interest rate by 25 basis points to 4.75%, its first rate cut in over four years and then again in July by another 25 basis points to 4.50%. Canada’s central bank cut rates by another 25 basis points in September to 4.25% and then by 50 basis points in October to 3.75%.

Most recently, the BoC cut rates by another 50 basis points to 3.25%. While analysts widely expect more rate cuts in 2025, most agree it will happen more gradually.

November’s print was once again good news for Canada on the inflation front. Notably, at the BoC’s late rate announcement, after two supersized rate cuts, Governor Macklem signalled that Canadians should expect a more gradual easing of rates going forward. Here’s what some analysts are saying:

Randall Bartlett, Senior Director of Canadian Economics, Desjardins: “While the deceleration in headline CPI inflation was positive in November, the underlying strength of core inflation needs to be monitored closely. As a result, the Bank of Canada’s guidance for more gradual rate cuts in 2025 remains intact. It also reinforces our call that the next rate cut in January is likely to be a more modest 25 basis points and that subsequent rate reductions should be of a similar magnitude.” 

Douglas Porter, Chief Economist and Managing Director Economics, BMO: “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…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.”

Claire Fan, Economist, Royal Bank of Canada: “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.”

Leslie Preston, Managing Director and Senior Economics, TD: “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.” 

Andrew Grantham, Senior Economist, CIBC Capital 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.”

Matthieu Arseneau, Deputy Chief Economist, and Ethan Currie, Analyst, National Bank of Canada: “ Overall, 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 the private sector, however, wage growth has normalized as the labour market has cooled off considerably. The sharp rise in the unemployment rate could continue, judging by various leading indicators (hiring intentions, vacancy rates, falling profits). For these reasons, the central bank must continue to create the conditions for a soft landing in 2025 by easing monetary policy further in the coming months.”

The next CPI inflation rate announcement with the numbers for December is on January 21, 2025.

The last time the CPI was under the Bank of Canada’s 2% inflation target was in February 2021 when it came in at 1.1%. Since then, it has been on a wild ride, jumping to 2.2% in March 2021 and 8.1% in June 2022. However, we can see just how precipitous the last few years have been when we take a broader look at the 10-year history of the CPI year-over-year percentage changes.

For a longer-term perspective, here’s how the CPI has changed since 1995: