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Canada: Energy Prices Keep Inflation Elevated in December

Consumer prices rose 1.9% year-on-year in December, a modest deceleration from November’s 2.1% pace. On a month-on-month basis, prices were up 0.2%.

Price growth was widespread, with seven of eight major categories seeing increases. Telephone services led household operations, furnishings and equipment costs lower, down 0.3% year-on-year, likely a reflection of discounted wireless service plans offered in the month.

Energy prices fell month-on-month, leading year-on-year price growth to 4.5%, from 7.6% in the month prior.

The Bank of Canada’s preferred measures of core inflation ticked up again: CPI-common rose a tick to 1.6% year-on-year, with a matching rise in CPI-trim, to 1.9%. CPI-median was unchanged at 1.9%.

Key Implications

Looking past the energy-led deceleration in inflation, hot growth of the Canadian economy in 2017 now appears to be turning into somewhat hotter price growth.

CPI-trim, at 1.9% year-on-year in December, is a far cry from the 1.2% pace seen in the spring months, with the other two Bank of Canada core measures following suit, albeit more modestly. While the Phillip’s curve relationship between growth and inflation may not be what it used to be, today’s data provides some evidence that it is not yet dead.

The Bank of Canada will likely take comfort both in that the growth-inflation nexus remains intact, and in their decision to increase the key policy rate to 1.25% earlier this month. Risks and uncertainty may result in increased caution, but ultimately, achieving the inflation control target will require further monetary tightening. We remain of the view that the balance of risks versus fundamentals favours the next rate hike falling in July.

TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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