Article18 January 2019Reading time 2 minutes

Canada inflation: Upside surprise

The holiday season didn't just bring presents to Canada - it brought upward price pressure to transportation and travel related components too. This was enough pressure to offset the decline in gasoline prices and bring headline inflation back to the Bank of Canada's 2% target - for now


The consumer price index in December rose 2.0% and 0.2% on an annual and monthly basis respectively. This was above consensus expectation (1.7% YoY) – though most of the surprise was due to one-off factors related to the holiday season, with volatile components such as travel tours (6.6% YoY) and air transportation (21.7% MoM). Movements in these components helped to offset the decline in gasoline prices. Nonetheless, we’d expect the downward trend of headline inflation to resume in the first part of 2019 as the fall in energy prices continues to feed through.

The Bank of Canada’s (BoC) three main measures of core inflation sustained their 1.9% average. Although persistently weak wage growth is a downside risk to core inflation – it hasn’t yet made a material dent in consumer prices.

Headline inflation is back at the BoC’s 2% target and core inflation has remained stable near this level too, but we don’t see this pushing the central bank to hike rates any earlier than July. The next hiking opportunity would probably be in April when a new monetary policy report is published, but we think a third quarter hike is more likely, as it allows the BoC to wait for confirmation that the Fed is still in hiking mode.