Stay Connected

Our News Centre and Blog is your link to a dynamic network of information, people, and ideas curated by our FX and payments experts.

Market Wire
Fueled By Air Travel Prices, Canada CPI Temporarily Soars 

Don Curren January 18, 2019

Canada’s consumer prices appeared to take off like a jet headed from Cuba to Toronto in December, but it was a methodologically driven surge in airfares that fueled CPI’s sharp rise to a higher cruising altitude, and overall inflation remains taxiing on the runway.

The loonie was also able to fly higher immediately after the release, but some of those gains were surrendered pretty quickly. perhaps as the narrow nature of inflation in December were recognized.

Statistics Canada said the Consumer Price Index (CPI) rose 2.0% on a year-over-year basis in December, following a 1.7% increase in November. Lower energy prices were offset by higher prices for various services, including air transportation, telephone services and travel tours. Excluding gasoline, the CPI rose 2.5% in December, it said.

The government statistics agency said a month-over-month increase in the air transportation index (+21.7%) reflected higher prices for travel during the holiday season.

A warning note cautioned readers that the methodology for the air transportation index was updated in March 2018 as part of the regular review of the CPI methodology. “Interpretation of the 12-month price change indicator should be made with caution, particularly in the year following the implementation of the new methodology,” StatsCan said.

On a seasonally adjusted monthly basis, the CPI rose 0.2% in December, following a 0.1% decline in November.

Economists had expected headline inflation of 1.7%. They had anticipated correctly that the Bank of Canada’s three preferred metrics for core inflation – common, median and trim – would all hold steady around November’s 1.9% average level.

The fact that all three measures of core stick to their sub 2% target level reflect the transient nature of the surge in headline inflation in December, and suggests sustained gains inflation aren’t likely at this juncture.

StatsCan said the price of energy products (-3.7%) continued to decline year over year in December. As crude oil prices continued to fall amid a global supply glut, consumers paid 8.6% less for gasoline in December compared with December 2017.

Consumers paid 6.1% more for telephone services compared with December 2017, when a series of industry-wide price promotions temporarily offered significantly lower prices.

The Bank of Canada held its policy rate steady at 1.75% at its first policy announcement date of the year on January 9, but also maintained its expectation that further monetary tightening is required to bring monetary conditions back to neutrality.

A sizable contingent of market participants expect, however, that the Canadian economy is at risk of a sharper slowing, and interest rates markets are currently pricing in stable monetary policy this year rather than any continuation of previous rate increases, an expectation that won’t be changed significantly by the inflation data.

Bottom Line: Canadian inflation data for December surprised to the high side, but with a methodological change in the measure of airline ticket prices driving strength in the headline print, the data don’t really challenge the expectation that underlying inflation is ebbing and the Bank of Canada’s push to neutral rates may ebb along with it. The brief boost it provided to the Canadian dollar was already dissipated in mid-morning trading.

Don Curren
Market Strategist and Content Editor

To receive our market updates and research reports before they hit the blog subscribe!