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Canada: Air Travel Drives a Modest Climb in December Inflation

Canadian consumer price inflation was 2.0% y/y in December, up a bit from November’s 1.7% pace. Markets were looking for a repeat of November’s 1.7% pace. On a seasonally-adjusted basis, prices were up 0.2% month-on-month.

Much of the acceleration can be put down to the transportation category, with a rebound of airfares over the holiday season the primary driver. In contrast, the energy sub-index was down 3.7% y/y on falling gasoline prices.

With energy prices holding back goods price growth (up just 0.2% y/y in December), it was service sector price growth that led the overall rise, up 3.5% year-on-year. This was the strongest gain in services since 2008, reflecting not only the aforementioned rise in airfares, but also higher telephone service costs (remember that December 2017 saw industry sales that drove down prices at that time). Statistics Canada also noted travel tours (+6.6%) and vehicle insurance premiums (+5.1%) as factors in the climb.

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The Bank of Canada’s preferred measures of core inflation were flat in December. CPI-common and CPI-trim remained at 1.9% year-on-year, while CPI-median held at (a downwardly revised) 1.8%.

Key Implications

Put it down to holiday travel. Markets were expecting an effectively unchanged inflation reading, but a surge in airfares led headline inflation higher in December despite a continued drag from energy prices. Some caution is needed before we get too excited, with Statistics Canada reminding us that a methodology change in the airfares category in early 2018 means we should remain cautious on year-on-year comparisons.

Indeed, despite the upside surprise to headline inflation, core measures continued their 2018 theme of slow and steady. These may be somewhat backwards-looking indicators, but the message remains clear: there are few signs of fundamental inflationary pressure at the moment.

The bigger story for the Bank of Canada right now is the impact of oil prices, which are still holding headline inflation back. The impact of production shut-ins, which have boosted heavy oil prices, will be slower real growth this quarter and heightened uncertainty. Their bias towards further interest rate hikes remains, but wait and see looks to be the Bank’s guiding principle for the near future. With inflation tame, there appears to be little harm in this approach.

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