Inflation rate ticks up to 2% in December

Canada’s annual inflation rate surprised economists by rebounding to two per cent last month as higher costs for airfares and fresh vegetables offset cheaper prices at the pump, Statistics Canada saidFriday.

December’s uptick came after inflation slowed down to just 1.7 per cent in November. Economists surveyed by Thomson Reuters Eikon were expecting the same number for December.

Statistics Canada reported Friday that the cost of food went up by 2.9 per cent in the past year, while alcohol and tobacco products went up by 4.4 per cent. Shelter costs, driven by higher mortgage rates, increased by 2.2 per cent.

Prices rose more on a year-over-year basis in seven provinces in December compared with the previous month, the report said.

British Columbia posted the largest year-over-year increase with a three-per-cent jump in inflation in December, driven by higher gasoline prices than in rest of the country.

However, outside the seasonal jump in airfares, Friday’s inflation report was largely as expected with a sizeable drop in energy prices and the usual seasonal declines in clothing and footwear, home entertainment, and travel services, said Josh Nye, senior economist at RBC.

“Energy prices were a major factor in inflation spending much of 2018 above the Bank of Canada’s two per cent target,” Nye wrote in a research note to clients. “But that dynamic has been flipped on its head thanks to a sharp decline in oil prices toward the end of last year.”

Economists expect inflation will be held below two per cent for the better part of 2019 as oil prices aren’t likely to climb back to the $70/bbl range seen in May through October 2018, he added.

“This inflation sweet-spot gives the Bank of Canada time to be patient in raising interest rates,” Nye said. “We think they’ll want to see how the economy is progressing through this latest oil price decline, and expect the current pause in their tightening cycle will extend through their next meeting in March.”