Canada's December inflation dashes hopes of early rate cut

Canada's annual inflation rate rose as expected to 3.4 per cent in December from 3.1 per cent in November, data showed on Tuesday, a sign of sticky inflation ahead of next week's interest rate decision.

The data matched estimates by economists polled by Reuters. On a monthly basis, consumer prices matched expectations as well and fell 0.3 per cent from November.

The annual inflation rate was largely driven by higher gasoline prices last month compared with the same period a year ago, Statistics Canada said.

Excluding gasoline, inflation slowed year over year, to 3.5 per cent in December from 3.6 per cent in November, Statscan said. Price of food purchased from stores rose 4.7 per cent in December, the same annual rate as November.

Excluding energy and food prices, the annual inflation rate slowed to 3.4 per cent from 3.5 per cent in November.

One of the Bank of Canada's (BoC's) core measures of underlying inflation, CPI-trim, edged slightly higher to 3.7 per cent, while CPI-median stayed at 3.6 per cent.

Sticky core measures show that overall inflation is likely to come down slowly. Headline inflation has been higher than 2 per cent, the mid-point of the central bank's 1-3 per cent target range, since March 2021.

The Canadian central bank raised its key policy rate to a 22-year high of 5 per cent between March of 2022 and July of last year to tame inflation. The central bank's next interest rate announcement is on Jan. 24, when it is expected to keep its key policy rate on hold.

Canadian money markets pared bets for a rate cut in March to a 34 per cent chance from a 46 per cent probability before the release of the data, but they still see a 25-basis-point reduction in April.

The Canadian dollar's decline slowed following the inflation figures. It was last 0.2 per cent down on the day at 1.3455 per US dollar.

The BoC had previously forecast inflation should hit its target by the end of 2025, but Governor Tiff Macklem - making his last public appearance of 2023 - told reporters it should be closer to the target by the end of this year.

Canada's economy stalled in October. In the fourth quarter, Canadian companies said their order books declined as interest rates crimped consumer spending, and they see inflation easing, according to a BoC survey published on Monday.