Canada’s headline inflation rate unexpectedly stalled in November, putting into question some market expectations for Bank of Canada rate cuts in 2024.

On a monthly basis, CPI inflation rose 0.1% in November, keeping the headline rate at 3.1%, Statistics Canada reported today. Economists had expected a slowdown to +2.8%. The Bank of Canada’s preferred measures of core inflation, CPI-trim and CPI-median, also stalled, remaining unchanged at +3.5% and +3.4%, respectively.

“The latest result reinforces the message that markets had been a bit aggressive in their pricing of early and often rate cuts,” noted BMO Chief Economist Douglas Porter.

Following easing inflation in October and negative GDP growth in the third quarter, markets and some economists had moved up expectations for the Bank of Canada’s first rate cut to as early as March or April 2024.

While most economists still believe rate cuts will be coming next year, the consensus now sees that happening by around the mid-year mark.

“Still, the bigger picture remains intact: The underlying inflation trend is lower, the economy is chilly, and the Bank is expected to begin trimming rates around mid-year,” Porter said.

“If anything, the release today serves as a reminder that inflation readings can still be ‘sticky,’ and why we continue to expect a cautious approach as the BoC starts to think about when to begin cutting interest rates,” added RBC Economics economist Claire Fan. “Our expectation is for the first rate cut to come around mid-year 2024, contingent on further (but widely expected) softening in CPI readings in the months ahead.”

In an interview with BNN Bloomberg on Monday, Bank of Canada Governor Tiff Macklem said interest rates may come down “sometime in 2024,” but didn’t offer a more specific timeline.

“We are certainly feeling more confident that monetary policy is working and increasingly, the conditions are in place to get us back to two-per-cent inflation, but that is not yet assured, we're not there yet,” Macklem said during the interview.

It’s not all bad news in the fight against inflation

Despite the higher-than-expected readings, there were still positive signals within the report.

Randall Bartlett from Desjardins noted that prices of cellular services are down 22.6% from last year, while energy prices are down more than they were last month.

The rise in grocery prices also continued to slow, while goods inflation showed continued improvement and services inflation was mostly unchanged.

“The November inflation data probably wasn’t what the Bank of Canada was hoping for,” Bartlett wrote. “But total CPI inflation is tracking below the Bank’s 3.3% y/y projection for Q4 in the October 2023 Monetary Policy Report.”

BMO’s Porter also said it’s also important to remember how much the inflation rate has already fallen, with the economy so far remaining largely unscathed. Just a year ago, headline inflation was at 6.8%, and 8.1% the year before that.

“Such swift and heavy declines in headline inflation are rare, and have typically only been witnessed in the wake of a recession; so the fast fall in the past year is very much welcome news,” he wrote. “It also keeps Canadian inflation precisely in line with the U.S. pace.”

Shelter costs remain the biggest drivers of inflation

Like previous months, shelter costs continue to be the main upward driver of overall inflation at an annualized growth rate of 5.9%, down slightly from a rate of 6.1% in October.

Rent prices are up 7.4% year-over-year, while mortgage interest costs—driven higher due to the Bank of Canada’s rate hikes—are up 29.8% from last year.  

“As such, it's not surprising that total CPI excluding shelter was unchanged at 1.9% y/y in November,” Bartlett wrote.