Canada’s annual headline inflation rate came in at 3.4 per cent in December while core inflation measures rose unexpectedly, leaving economists split on when to expect rate cuts.

“It’s a bit disappointing that we're seeing a little more inflation pressure than anticipated,” Sal Guatieri, senior economist at BMO Capital Markets, told BNN Bloomberg in a Tuesday interview following the release of Statistics Canada’s monthly Consumer Price Index (CPI) report. 

He noted that while the headline number was on par with economists’ expectations, the core trim and median measures, which are closely watched by the Bank of Canada, notched a surprise increase, instead of the expected decline.

Guatieri said the print demonstrates that there’s still a ways to go before the Bank of Canada feels confident that inflation will reach its two per cent target – reinforcing his team’s view that the central bank likely won’t cut rates until June.

Core trim and median inflation measures filter out components with more volatile price fluctuations.

Averaged together, they increased 3.65 per cent last month, from an upwardly revised 3.55 per cent a month earlier. That’s faster than the 3.35 per cent pace expected by economists.

ECONOMISTS SPLIT ON TIMING OF RATE CUT

Economists were surprised by the figures, but some were still calling for rate cuts earlier in the year.

The Bank of Canada’s trendsetting interest rate is currently set at five per cent, with most economists expecting rate cuts at some point in 2024.

“There wasn't a lot of good news in the inflation print today,” said Randall Bartlett, senior director of Canadian economics with Desjardins Group.

“When you unpack what's underneath the hood of this re-acceleration in headline inflation, you can see that underlying inflation, by a bunch of different measures, moved considerably higher.”

Despite the unfavourable data, Bartlett told BNN Bloomberg that he believes inflation will soon resume a downward trend, and he expects the Bank of Canada to cut rates in the spring.

“Today's print hasn't changed our call for a rate cut coming in April of this year,” he said in a television interview.

“We expect inflationary pressures to continue to trend lower and we think that the Canadian economy is likely to tip into a short and shallow recession in the first half of 2024, so those pieces combined, we think, are going to be sufficient to help the Bank of Canada justify moving rates lower.”

Tu Nguyen, economist with tax and consultancy firm RSM Canada, said the Bank of Canada “should begin slashing interest rates as early as April,” arguing that at this point, inflation is mostly being driven by shelter costs. 

“Keeping rates higher for longer will not help. Shelter inflation occurs due to two factors; high rent growth due to the housing shortage and rising mortgage interest payments,” Nguyen said in a written statement.

“The housing shortage is a structural problem that will take many years to address … and high mortgage interest payments are directly caused by monetary policy.”

Rising rent prices are another inflationary factor impacting the CPI. They rose 7.7 per cent year-over-year in December following a 7.4 per cent increase in November, Statistics Canada said in their report, noting that high rates are keeping would-be-buyers in the rental market.

“Among other factors, a higher interest rate environment, which can create barriers to homeownership, put upward pressure on the index,” the agency said.

WAGE GROWTH, LAGGING PRODUCTIVITY 

Bartlett flagged that productivity in Canada is lagging behind wage growth, creating a significant source of inflationary pressure he predicted will be difficult to overcome.

“What we need to see is more investment across the board, whether it's in digital technologies, whether it's in manufacturing equipment, to start increasing Canada's overall productivity,” he said.

On the other hand, increases to Canada’s population will likely continue to outpace hiring going forward, Bartlett said, increasing the unemployment rate and lessening wage pressures, which should help to ease inflation.

Guatieri acknowledged that there were some signs of slowing inflation in Tuesday’s CPI, with some adjusted measures “removing the sting” from an otherwise negative report.

The headline inflation rate with food and energy excluded saw a lower rate of inflation in December, Guatieri noted.

“(It’s) a bit of a mixed bag. Really it’ll come down to what the Bank Canada continues to pay the most attention to,” he said.

The Bank of Canada’s next interest rate decision is scheduled for Jan. 24.

With files from Bloomberg News