Canada Inflation Retreats from 2% Level in December

Headline inflation in Canada slowed in December after crossing the 2% level for only the second time in three years in the previous month.

However, measures of core inflation strengthened in the month, which is likely to reinforce expectations for further rate increases from the Bank of Canada this year.

Canada's consumer-price index rose 1.9% on a year-over-year basis in December, Statistics Canada said Friday, following a 2.1% advance in November. December's result matched market expectations, according to economists at Royal Bank of Canada.

On a month-over-month basis, prices declined 0.4% in December.

The December report indicated underlying, or core, inflation strengthened in the month. Underlying prices rose in a range from 1.6% to 1.9%, based on the three preferred gauges used by the Bank of Canada for an average of 1.8%, versus the previous month's 1.7% average. The average of the three core measures hit a low of 1.3% in May.

"Given that two of three core measures -- somewhat surprisingly -- rose on the month, we're hardly chalking this up as a negative inflation report," said Nick Exarhos, economist at CIBC World Markets.

The Bank of Canada this month raised its main interest rate by a quarter-percentage point, to 1.25%, given strength in underlying trends. The central bank sets rate policy to achieve and maintain 2% inflation, and said it expects inflation to remain close to 2% through 2019. At its last meeting, the Bank of Canada said the economic outlook likely warranted further rate rises, but added it would move gradually given the risk posed by uncertainty in trade policy.

"The gradual strengthening in core inflation evident in December's CPI figures would seem to justify the Bank of Canada's recent decision to raise interest rates again," said Paul Ashworth, economist at Capital Economics. The strengthening in core inflation "will reinforce market expectations of yet more interest rate hikes."

For the bulk of 2017, the annual inflation rate in Canada remained below 2%, hitting a two-year low in June of 1% before steadily climbing. Statistics Canada said the annual average increase in inflation in 2017 was 1.6%, or above the comparable 1.4% recorded in 2016 and 1.1% in 2015.

The dip in annual inflation in December was tied to gasoline. Gasoline prices rose 12.2% on a one-year basis, but that marked a deceleration after prices rose nearly 20% in November. With crude prices rising well above $60 a barrel, economists say gas prices are likely to stage big increases in early 2018.

Car prices rose 3.7%, and food purchased at restaurants climbed 2.9%. Some analysts suggested the price advance at restaurants was likely tied to a move in Canada's most populous province, Ontario, to raise the minimum wage by 21% as of January.

On a seasonally adjusted basis, inflation rose 0.2% in December month-over-month.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

January 26, 2018 10:08 ET (15:08 GMT)