Q4 2024: Inflation Watch
In this issue, we discuss the uncertainty caused by trade tensions, some cooling in shelter prices and effects of the Canadian government’s tax moves.
Steve Morris
“The headline Consumer Price Index (CPI) increased by 1.8% in December on a year-over-year basis (figure 1), in line with market consensus. The future path of inflation is uncertain as heightened U.S.-Canada trade tensions may disrupt the easing of prices.”
Steve's Take: “The headline Consumer Price Index (CPI) increased by 1.8% in December on a year-over-year basis (figure 1), in line with market consensus. The future path of inflation is uncertain as heightened U.S.-Canada trade tensions may disrupt the easing of prices.”
Shelter prices have continued to gradually cool but remain elevated, increasing 4.5% on a year-over-year basis (figure 2). Decelerating mortgage interest cost increases have been a primary driver of the price deceleration, while homeowners’ replacement costs (home prices) are back to flat in December on a year-over-year basis after being negative for most of 2023 and all the earlier months of 2024. Rent price increases have continued to cool on a year-over-year basis, but remain elevated at 6.9%.
The GST/HST break placed significant downward pressure on a few sectors, including clothing and footwear (-4.5% year over year), food purchased from restaurants (-1.6% year over year) and alcoholic beverages (-1.2% year over year). Statistics Canada noted that roughly 10% of basket components were impacted by the GST/HST break in the December report.
Figure 1: CPI Change
12-month, YTD, and MoM change in the Statistics Canada Consumer Price Index, monthly, not seasonally adjusted (Table 18-10-0004-01)
Figure 2: Canada headline CPI contribution year over year
Bank of Canada Consumer Price Index Portal
Real return bond (RRB) trading activity was light in Q4, consistent with trends seen since the Government of Canada’s cessation of RRB issuance in November 2022 (figure 3). Daily trading volume was under $70M for all days except for December 11, where $86M of trading volume was observed. With lower liquidity in RRB markets, it may take up to several months to complete the purchase of larger RRB lot sizes at efficient prices.
We continue to monitor entry points for clients who are considering using alternatives to RRBs to hedge Canadian inflation, including U.S. Treasury inflation protected Securities (TIPS) and inflation swaps. Over the past quarter, the gap between 10-year breakeven inflation rates in the U.S. and Canada narrowed from 58 basis points (bps) to 48 bps (figure 4). This suggests that the cost of implementing a U.S.-based inflation strategy has decreased over the quarter.
Figure 3: RRB trading volume
Bloomberg
Figure 4: U.S. vs. Canadian 10-year breakeven inflation rates
Bloomberg
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CPI change (figure 1)
12-month, YTD, and MoM change in the Statistics Canada Consumer Price Index, monthly, not seasonally adjusted (Table 18-10-0004-01)
Canada headline CPI contribution year-over-year (figure 2)
Bank of Canada Consumer Price Index Portal
RRB trading volume (figure 3)
Bloomberg
US vs. Canadian 10-year breakeven inflation rates (figure 4)
Bloomberg
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