Canada’s Inflation Slows, Opening the Door for Further Rate Cuts

In November, Canada saw a slight deceleration in consumer price growth, creating an opportunity for further interest rate cuts, even after the Bank of Canada’s recent significant reduction. According to Statistics Canada, the consumer price index (CPI) remained stable from the previous month, increasing by 1.9% year-over-year, slightly under the 2% increase economists had forecasted. This marks the 11th consecutive month that inflation has stayed within the Bank of Canada’s target range of 1% to 3%, and for the fourth month in a row, inflation remained at or below the midpoint of that range.

This slowdown in inflation is largely due to a broad easing of price increases across various sectors, partially driven by seasonal sales events like Black Friday. Core inflation, which excludes volatile food and energy costs, also rose by 1.9% year-over-year, down from 2.3% in October. The Bank of Canada’s preferred inflation measures, the trimmed mean and weighted median CPI, both remained steady at an average rate of 2.65%, following an uptick in October.

The Bank of Canada continues to target inflation around 2%, while focusing on encouraging economic growth to absorb unused capacity. Last week, the central bank lowered its benchmark interest rate by half a percentage point, marking the fifth consecutive rate cut since June. The bank also indicated a more gradual approach to monetary policy moving forward, with inflation expected to remain close to 2% over the next few years.

In contrast, inflation in the U.S. has struggled to align with the Federal Reserve’s 2% target, increasing to 2.7% last month. However, the U.S. central bank is still expected to implement a third consecutive rate cut.

In Canada, mortgage interest rates continue to be the primary driver of inflation, although they have eased for the past 15 months. Shelter costs grew at a slower pace in November, but rent prices remained elevated year-over-year. Food prices continued to rise, albeit at a slower rate, and prices for travel services fell again, though less sharply than in October. Seasonal sales also led to reductions in prices for goods like household furnishings, clothing, and footwear.

While inflation is significantly lower than the post-pandemic peak of over 8%, the Canadian economy remains sluggish, and the job market is showing signs of weakness. Job seekers continue to outnumber job openings. Bank of Canada Governor Tiff Macklem recently spoke about the risks to the inflation outlook, noting that a temporary federal tax holiday on certain consumer products could lower inflation in the short term, while rising wages combined with weak productivity could drive inflation higher as businesses pass on those costs. He also highlighted the uncertainty of potential new U.S. tariffs on Canadian exports.

Governor Macklem emphasized that while inflation has returned to the target of 2%, the Bank of Canada remains concerned about both higher and lower-than-expected inflation, reflecting the challenges in managing the broader economic environment.

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