Inflation Declines, Strengthening the Bank of Canada’s…

A broad slowdown in Canadian inflation reinforces expectations that the Bank of Canada will cut rates further in 2025, though the era of super-sized reductions may be over.

The November report from Statistics Canada found the Consumer Price Index rose 1.9% year over year in November. That marked a slight easing from the 2.0% year-over-year rise recorded in October but is still higher than September’s 1.6% reading. The downtick has firmly anchored economist expectations that the Bank of Canada will make a modest quarter-point interest rate cut in the new year.

While in line with analysts’ expectations, the latest inflation numbers fall just below the Bank of Canada’s 2% target. The small decline was broad-based, led by lower mortgage interest costs and travel prices, along with seasonal factors such as lower gasoline prices and Black Friday sales, according to the report.

However, the positive headline inflation numbers were tempered by persistently high core measures like trim inflation, which rose 2.7%, and median inflation, up 2.6%, both above the central bank’s 2.0% target. Core inflation measures strip out volatile components of food and energy prices to provide a clearer picture of underlying trends.

Today’s data marks the first of two inflation reports the Bank of Canada will review before its next decision on interest rates, happening Jan. 24.

The following is commentary from economists in notes to clients issued in response to the report.

Lenoy Dujon, economist at Morgan Stanley

“While the Bank’s core inflation measures were sticky, we believe the Bank will remain focused on the overall inflationary trend. With inflation contained and the Bank wanting to improve economic growth, the Bank expects ‘further rate cuts in the future.’ However, the timing and pace of future rate cuts will still depend on the incoming data.

“As the Bank shifts towards a ‘more gradual approach’ to monetary policy, we maintain our call for a 25-basis-point cut at the January 29 meeting—but remain attentive to the incoming data.”

Rachel Siu, head of Canadian fixed income strategy at BlackRock

“Overall, the November inflation report was mixed—while headline CPI eased to 1.9% year over year, core measures showed some stickiness. We continue to expect the Bank of Canada to trim policy rates by 25 basis points in January and shift toward a more gradual approach to cutting rates in 2025.”

Douglas Porter, chief economist at BMO Economics

“The mixed message of a sub-2% reading on headline and core, versus meaty readings on their preferred core metrics suggests that this report is a bit of a wash for the policy outlook.

“While the Bank of Canada will welcome the renewed dip below 2% for headline inflation, they would prefer that the sticky core trends stayed away this holiday season. Note that the Bank’s October MPR forecast for core inflation was an average of 2.3% for Q4—instead, it’s tracking at 2.65%, a notable miss. The deepening sag in the Canadian dollar is not going to help. In a nutshell, this report reinforces the point that the Bank will now turn to a more gradual path for rate cuts as we head into 2025. While we expect a further trim on January 29, another meaty set of core readings next month will prompt some chattering about a pause, especially with the Fed seemingly headed that way in January and the loonie on the ropes.”

Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets

“Given the seasonal element in those price declines, the Bank of Canada would typically look to its preferred core measures of inflation to guide upcoming monetary policy decisions. However, these measures provided conflicting signals in November. Both core-median and trimmed mean rose 0.3%, which pushed the average of the three-month annualized rates up to 3.3% from an upwardly revised 2.9% in October. Given that mortgage-interest cost inflation has decelerated and will likely continue to do so now that the Bank of Canada has conducted a number of rate cuts, central bankers might want to look through that strength in their preferred measures.

“We continue to expect that the central bank will cut rates another 25 basis points in January, but we anticipate a pause in March. Our mid-year and end-of-year forecasts of 2.75% and 2.25% remain unchanged for 2025, given that the disinflationary pressures from mortgage renewals and slower population growth are likely to weigh on prices next year.”

Andrew Grantham, senior economist at CIBC Economics

“Inflation was decelerated slightly in November, ahead of what will be a volatile period for CPI readings thanks to the temporary reduction in GST on certain items. Headline CPI was flat on the month and eased to 1.9% y/y, with both readings coming in a tick below consensus expectations. Telephone service prices were the largest downward contributor to inflation on a year-over-year basis, with deeper-than-normal Black Friday discounting also impacting prices for clothing and furniture as well. While there was a pop in hotel prices in Ontario due to the Taylor Swift concerts, other price increases related to these were not as large as in some other countries and didn’t have a big impact on the aggregate figures.

“It will remain difficult for policymakers to determine the underlying trend in inflation over the next few months, with December figures weakened by the mid-month start of a GST holiday on certain goods/services. The reinstating of GST in mid-February will then temporarily boost CPI readings. While the CPI-trim and median measures should be less impacted by such temporary factors, throughout this period the Bank’s assessment of slack in the economy, including how it views upcoming employment data, should become even more important in determining policy decisions. We continue to forecast a 25bp cut from the Bank at the January meeting.”

Leslie Preston, managing director and senior economist at TD Bank

“Our forecast calls for headline inflation to rise somewhat above the Bank’s 2% target next year as likely tariffs raise goods costs (see forecast). However, we don’t expect that this is high enough to dissuade the BoC from cutting interest rates further. With an America-First agenda south of the border, Canada’s economy faces a challenging backdrop, and lower interest rates are required for support. That said, at 3.25% on the overnight rate, we are now at the edge of “neutral” territory, further cuts are expected to come at a more measured pace next year.”

Tu Nguyen, economist at RSM Canada.

“Inflation has gotten under control … we expect a 25-basis point cut in January given that price stability is essentially restored.

“Since mortgage interest payments remain the largest contributor to the deceleration in the Consumer Price Index, more disinflation is expected with further rate cuts.

“Looking ahead, it’s unclear whether the inflationary or disinflationary effects of the slowdown in immigration in 2025 will be stronger. While it will reduce the pressure on housing, less immigration also means a lower labor supply, which could push up wages and eventually consumer prices.”

Charles St-Arnaud, chief economist at Alberta Central

“The breadth of inflationary pressures narrowed very slightly in November. The share of components of CPI rising by more than 5% was unchanged at 14% and the share of components increasing by more than 3% eased to 24% from 27%. Both measures are in line with their historical norm. The unchanged share of components rising by 5% could suggest some stickiness in inflation.

“The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures increased in November but remained consistent with the inflation target. As such, we observe that the 3-month annualized changes in the main CPI components are below 3%, except for food prices (+4.4%), with the 3-month annualized changes in headline CPI at 1.8%. The recent acceleration in food prices could be due to the weaker Canadian dollar at a period when grocers are changing from local suppliers to imported produce.

Claire Fan, economist at Royal Bank of Canada

“Inflation readings in Canada remained within close range to Bank of Canada’s 2% target in November – ticking down to 1.9% after a slight acceleration in October. We expect a softening economy (falling per-capita GDP and rising unemployment) will keep pressing down on domestic price pressures going forward.

“The Bank of Canada cut the overnight rate by 50 basis points as expected last week but signaled clearly that further reductions would be more gradual. That’s in line with our outlook, which expects consecutive smaller 25 basis point cuts to the overnight rate down to 2% (below the Bank of Canada’s 2.25% to 3.25% estimated neutral range) by July 2025.”

Thomas Ryan, North America economist at Capital Economics

“The key takeaway from today’s data is that the small drop in headline inflation was due to sharp declines in a handful of components driven by Black Friday discounts. However, the Bank of Canada will place more emphasis on the second straight month of strong increases in CPI-trim and CPI-median. These measures exclude the large Black Friday deal-related price drops in consumer goods, making them a better gauge of underlying trends.

“While this marginally increases the chances that the Bank pause at the January meeting, we still expect a 25-basis-point rate cut—though the December CPI report still to come will be an important factor in that decision.”

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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