Canada CPI Preview: Forecasts from four major banks, inflation could edge back within BoC’s target range

We look for headline CPI to edge lower to 3.0% YoY in November as softer energy prices and a headwind from seasonal factors hold prices unchanged on the month. Shelter prices will remain the key driver behind a 0.25% (SA) increase for the ex. food/energy (xFE) aggregate, along with a modest rebound in core goods. We also look for further easing across the BoC's preferred measures of core inflation with CPI-trim/median forecast to slow to 3.40% YoY, with an even larger deceleration on a 3m annualized basis to 2.3%. However, we do not believe the BoC will read too deeply into this development given the expected rebound in December, especially with one more CPI report before the January meeting.

We expect Canadian inflation pressures to have moderated more in November. Headline inflation is expected to have dropped to 2.9% from 3.1% in October reflecting a pullback in retail gasoline prices and further easing in food price growth. That would mark the second time since March 2021 that the reading dips back within the Bank of Canada’s 1%-3% target range for inflation. We expect price growth excluding food and energy products stayed at 3.4% YoY in November, driven by higher shelter costs – more than a third of the rise in ex-food & energy prices in Canada as of October came from mortgage interest costs as higher interest rates continue to flow through to household debt payments with a lag. Both BoC’s preferred core measures – CPI trim and CPI median are also expected to have eased again in November, extending improvements seen in the prior month. Further softening in the economic backdrop and slower price growth should reinforce that the BoC is done hiking interest rates for this cycle. We don’t expect a pivot to rate cuts right away – central banks will be cautious about declaring victory over inflation too early. We see the BoC starting the easing cycle around the middle of 2024.

The drop in gasoline prices may translate into a no-change print for the headline index before seasonal adjustment. If we’re right, the 12-month rate of inflation should come down from 3.1% to a 5-month low of 3.0%. Similarly to the headline print, the core measures preferred by the Bank of Canada should ease, with CPI-med likely moving from 3.6% to 3.3% and CPI-trim from 3.5% to 3.4%.

Inflation likely held nearly steady at 3.0% YoY in November, with prices unchanged on the month (+0.2% seasonally adjusted). While gasoline prices were broadly flat in November, other energy prices may have been a positive contributor. Food price inflation should have continued to advance at a slower pace than a year ago. Excluding food and energy, inflation may have accelerated slightly on a YoY basis. However, with the drivers of core inflation becoming less widespread (mainly rents and mortgage interest costs), the Bank of Canada’s preferred CPI-trim and CPI-median measures of inflation likely continued to gradually decelerate.