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Gasoline prices help drive inflation up to 3.4%

Canada’s annual inflation rate jumped to 3.4 per cent in Decemberaccording to data released by Statistics Canada on Tuesday.

That’s after both October and November saw inflation hold steady at 3.1 per cent compared to the previous year.

StatsCan said that the price of gasoline, air travel, passenger vehicles and rent drove the figure higher in December.

Food prices at stores also went up 4.7 per cent compared to last year, the same rate of increase as in November.

Without gasoline, inflation dropped compared to November

In its release, the federal statistics agency pointed out the headline figure of 3.4 per cent inflation was “largely the result of higher year-over-year prices for gasoline in December compared with November.” 

While StatsCan says lower gasoline prices pulled inflation down in December 2023, back in December 2022, gasoline prices were down even more.

This leads to something called the “base-year effect,” where comparing today’s figures to last year’s can show a wider gap. It’s partly because of this effect that many economists predicted inflation numbers similar to what was released today.

If gasoline prices were excluded, Statistics Canada said the consumer price index for December would be even higher, at 3.5 per cent.

But inflation minus gasoline in December was lower than inflation minus gasoline in November.

Inflation remains higher than central bank target

With the so-called “headline” inflation number at 3.4 per cent, the economic measure is still higher than the Bank of Canada’s target of two per cent.

The central bank has increased interest rates 10 times since early 2022 to try and tamp down high inflation rates, and while a slowdown in inflation has led Bank of Canada governor Tiff Macklem to keep rates steady at five per cent for the last few months, many economists predict a rate cut could come sometime in 2024.

Speaking at the end of 2023, Macklem said it was too early to say if or when that would happen.

“I know it’s tempting to rush ahead to that discussion. But it’s still too early to consider cutting our policy rate,” he said at the time.

Economists from BMO have indicated that December 2023’s inflation data still points to interest rate cuts in mid-2024, while CIBC is predicting the central bank will need to see “more progress” on some elements of inflation before considering a drop in interest rates.

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The inflation data comes a day after a Bank of Canada survey showed Canadians are increasingly cutting back on spending, while mortgage-holders remain confident they can keep up with higher payments when their loans renew.

According to the central bank’s fourth-quarter consumer expectations and business outlook surveys, roughly two-thirds of Canadians said they were reducing spending or planning to do so because of their expectations for interest rates and inflation.

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