Canada CPI inflation holds steady at 3.1% in November vs. 2.9% forecast

Statistics Canada informed that the Consumer Price Index (CPI) rose 3.1% on a year-over-year basis in November, matching the 3.1% increase in October. The reading was above the 2.9% of market consensus. The CPI rose 0.1% in November on a monthly basis, against expectations of a 0.2% decline and matched the increased recorded in October. 

The Core CPI rose 0.3% in November. The Bank of Canada (BoC) CPI Core increased by 0.1% on a monthly basis and rose 2.8% compared to a year ago, slightly above the 2.7% recorded in October. 

A different report showed that prices of products manufactured in Canada, as measured by the Industrial Product Price Index (IPPI), fell 0.4% in November, less than the 0.8% decline expected. Prices of raw materials purchased by manufacturers operating in Canada, as measured by the Raw Materials Price Index (RMPI), decreased 4.2% in November, more than the 3.5% decline expected. 

Market reaction to Canada inflation data

The Canadian Dollar rose across the board after inflation data came above expectations. The USD/CAD fell below 1.3350, reaching levels not seen since early August. 

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(This section below was published as a preview of Canada CPI at 07:00 GMT)

• The Canadian Consumer Price Index is foreseen rising 2.9% YoY in November.
• The BoC Core CPI to show the lowest inflation reading since June 2021. 
• Canadian Dollar is set to remain firm versus the US Dollar. 

Canada will release inflation-related data on Tuesday, December 19. Statistics Canada will publish the November Consumer Price Index (CPI), which is foreseen to increase 2.9% YoY, below the 3.1% recorded in October. On a monthly basis, the index is expected to decline by 0.2% after a 0.1% increase in the previous month. The Canadian Dollar (CAD) remains firm versus the US Dollar (USD), trading at four-month highs. 

The Bank of Canada (BoC) will publish the Core Consumer Price Index, which excludes the most volatile components such as food and energy prices. In October, the annual BoC Core CPI increased by 0.3% MoM and 2.7% YoY. The figures will be closely watched for the Canadian Dollar (CAD) potential direction and for BoC monetary policy expectations. 

What to expect from Canada’s inflation rate?

Price pressures in Canada are expected to have eased further in November. Inflation, as measured by the change in the annual CPI, is anticipated to slow in November closer to  2.8%, the 2023 year-low set in June. After that month, the CPI rebounded, reaching 4% in August before turning downward. All measures of inflation, including the Core CPI, are expected to have slowed, indicating softer price pressures but still remaining above the Bank of Canada’s 2% target.

If the numbers confirm that inflation continues to soften, it may not necessarily be bad news for the Canadian Dollar. Investors could welcome this news as softer inflation eases the pressure on the Bank of Canada to tighten monetary policy further. As the global debate centres around when central banks might start cutting interest rates next year, an unexpected rise in inflation is not expected to bring back rate hikes to the discussion. However, it could anticipate markets looking at higher rates for an extended period, a scenario that could benefit the Loonie, albeit briefly.

"Inflation has decreased, but it still remains relatively high," said BoC Governor Tiff Macklem in his final speech of the year on Friday. He cautioned that "the effects of past interest rate increases will continue to work through the economy, restraining spending, and limiting growth and employment. Unfortunately, this is necessary to address remaining inflationary pressures. Yet, this period of economic weakness will pave the way for a more balanced economy. We anticipate growth and job opportunities to increase later next year, bringing inflation closer to the 2% target."

When is the Canada CPI data due and how could it affect USD/CAD?

Canada is set to release the Consumer Price Index for November 2023 on Tuesday, December 19, at 13:30 GMT. These figures might impact the Canadian Dollar through changes in monetary policy expectations from the Bank of Canada. However, the impact could be limited considering that the BoC, like the Fed and other central banks, is expected to be already done with rate hikes as inflation drops and economic growth slows.

The USD/CAD resumed its downward movement last week due to a weaker US Dollar. The bearish pressure emerged after the Federal Reserve's (Fed) December meeting, particularly on the back of Fed officials forecasting rate cuts for next year. The pair is hovering around its lowest level since August, with a bearish bias.

Last week, USD/CAD broke below the 200-day Simple Moving Average (SMA), standing at 1.3510, reinforcing the negative bias. If the pair stays below 1.3440, the bearish pressure is likely to persist, possibly resulting in fresh lows. The next significant short-term support level is around 1.3300, followed by 1.3250.

Significant action would require shocking inflation numbers. After October's CPI report, USD/CAD showed a minimal reaction. Numbers below expectations could weigh on the Loonie, though overall, it might be perceived as positive news. Conversely, evidence of a significant rebound in inflation could bolster the Canadian Dollar, but perhaps only moderately. A higher-than-expected inflation figure would add pressure on the BoC to maintain higher rates for longer. Such a scenario would mean a more extended period of many Canadians being “squeezed by higher interest rates”, as highlighted by BoC Governor Macklem in his remarks on Friday.

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