Gasoline Prices Drive Canada’s Inflation Up to 3.4%

Canada‘s annual inflation rate jumped to 3.4 per cent in December, according to data released by Statistics Canada. This is after inflation held steady at 3.1 per cent in both October and November compared to the previous year. The increase in inflation was primarily driven by higher prices of gasoline, air travel, passenger vehicles, and rent.

Food prices at stores also rose by 4.7 per cent, the same rate of increase as in November. According to Doug Porter, chief economist with Bank of Montreal, the inflation rate is slightly higher than desired, although it is an improvement from the previous year. Canadians may be spending less on discretionary items such as travel tours, indicating some underlying softness in consumer spending.

Gasoline prices played a significant role in driving up the inflation rate. While gas prices actually fell in December 2023 compared to the previous month, they had fallen even more in December 2022. This base-year effect creates a wider gap when comparing year-over-year figures, contributing to the higher inflation rate. If gasoline prices were excluded, the consumer price index for December would be even higher at 3.5 per cent.

The Bank of Canada has increased interest rates 10 times since early 2022 to curb high inflation rates. However, due to a slowdown in inflation, the central bank has kept rates steady at five per cent for the last few months. Many economists predict a rate cut may occur in 2024. Bank of Montreal suggests that December 2023’s inflation data indicates a mid-2024 rate cut, while CIBC believes the central bank needs to see more progress in certain inflation elements before considering a rate decrease.

Bank of Canada Governor Tiff Macklem stated in December that it was too early to determine if or when a rate cut would happen. While the recent inflation rates suggest some improvement, there are concerns that inflation pressures could resurface. The central bank remains cautious and wants to ensure that inflation is under control before considering any further policy adjustments.

A recent Bank of Canada survey revealed that Canadians are increasingly cutting back on spending due to expectations for higher interest rates and inflation. Approximately two-thirds of Canadians mentioned reducing spending or planning to do so as a result. These factors have an impact on consumer behavior and economic activity.

Canada’s annual inflation rate reached 3.4 per cent in December. While the increase was driven by various factors such as gasoline prices, the central bank is closely monitoring the situation. The possibility of future rate cuts remains uncertain, and further progress in controlling inflation is necessary.