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The November Consumer Price Index report, due Tuesday, is expected to show headline inflation holding steady at around 2.0%. That level is in line with the Bank of Canada’s target and a trend toward moderating inflation.
Philip Petursson, chief investment strategist at IG Wealth Management, says the central bank’s measures have effectively curbed runaway inflation. “Overall, we see inflation stabilizing near the 2% level over the next six months,” he says, adding that “the Bank of Canada has done its job with getting inflation back to target levels.” However, some analysts caution that seasonal disinflationary pressures and temporary fluctuations in core inflation introduce a wrinkle.
Possible Short-Term Volatility in Inflation
While many experts foresee inflation being anchored at 2% in the coming months, some point to potential short-term volatility due to seasonal factors and ongoing economic adjustments. “Shelter inflation has been the last clear remaining strong component of total inflation and is a large component overall, but has been starting to slow more over the last few months,” says Citi economist Veronica Clark.
Shelter costs, approximately 30% of the CPI basket, have an oversized impact on core inflation. Clark expects shelter inflation to be “much softer in November,” and notes that goods prices and services, particularly more discretionary services, have eased significantly.
“We expect the upcoming CPI report will likely show headline inflation held steady at 2% year over year, in November,” says Michael Davenport, economist at Oxford Economics. He says the report will also likely show a continued easing in core inflation and a further deceleration in shelter and services inflation, in line with recent trends.
Eric Lascelles, chief economist at RBC Global Asset Management, says inflation could ease more than expected due to seasonal factors. “Canadian November CPI could land below the consensus, given substantial seasonal disinflationary pressures that tend to arise in November, and the fact that the Canadian economy continues to open up additional economic slack,” he says.
While they’re expected to show signs of softening, shelter costs continue to be the main driver, mostly due to rising rent and mortgage interest costs. More recently, “both of these [factors] are starting to decelerate, arguing for incrementally fewer pressures over time,” Lascelles assures.
Davenport says falling energy prices and broader goods deflation have also contributed to lowering CPI inflation over the past year. However, Petursson warns that the persistent weakness of the Canadian dollar could keep inflationary pressures simmering: “The difference in interest rate policy between the Bank of Canada and the [US] Federal Reserve leads to the expectation for continued loonie weakness. These two forces should cancel each other out, keeping inflation well within the BoC’s target.”
Risks to the Inflation Outlook
Potential risks both north and south of the 49th parallel could unravel Canada’s economic recovery, driving inflation and derailing the Bank of Canada’s monetary easing cycle.
“The biggest inflation risk is that price pressures accelerate, in part given sticky inflation in the US that speaks to generalized risk, [but also due to] the risk that a trade war with the US could increase Canadian prices,” says Lascelles.
Canada would likely retaliate with proportional tariffs on US goods if Trump imposes 25% tariffs on Canadian imports. The tit-for-tat trade tactics “would push Canada into a recession in 2025 [hurting businesses and slowing down economic activity] and [at the same time] cause a sharp spike in inflation [due to higher costs of goods and services],” cautions Davenport.
Closer to home, Clark notes that “strong wage gains and recent stronger housing demand remain the largest upside risks to inflation, as well as a weaker Canadian dollar,” are key obstacles to taming inflation.
Petursson argues that the greater risk to the current outlook is the possibility of lower-than-expected inflation on overall weaker demand in Canada. “This would most likely come from a shift in consumer discretionary spending from broad consumption to increasing mortgage payments [upon renewal],” he notes.
Then there’s the political risk as Canada goes to the polls in the new year. Davenport points to recent opinion polls that suggest “Canadians will vote in a Conservative government next year, which would usher in substantial change to the economic and fiscal agenda,” including removing the federal carbon tax. “Eliminating the federal carbon levy (which will rise to C$95 a ton on April 1, 2025) would immediately lower gasoline prices by around 25 cents and directly reduce the Consumer Price Index by around 0.7 percentage points on its own,” he says.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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