Canadian inflation has been driven by two key pressure points in recent years: shelter and food. Statistics Canada’s (StatCan) data shows shelter inflation is finally cooling, helping to keep the Consumer Price Index (CPI) stable in November. But BMO Capital Markets is warning investors that the other half of the problem is flaring up again—food prices. Like shelter, food is a category that punches well above its weight in shaping inflation expectations, complicating the Bank of Canada’s path forward.
Canadian Headline Inflation Still Suppressed By Gasoline Prices
Canadian headline inflation remains artificially subdued by the base effect in gasoline prices. CPI rose 2.2% year-over-year in November, unchanged from October. Strip out gasoline, and inflation looks less benign: CPI excluding gasoline remains at 2.6%, a level that’s been persistent for the past three consecutive months. Stability is usually welcome, but at this level, it’s uncomfortably high—a problem that may not be apparent to casual observers.
CPI excluding gasoline is close to the Bank of Canada’s (BoC) 3.0% upper bound of tolerance. Headline CPI is set to drift higher and join this number as the dampening effect of lower gas prices fades in the coming months. All three of the BoC’s preferred CPI core measures came in at 2.8% in November, just 0.2 points below the central bank’s upper tolerance limit.
At a glance, the gap between the BoC’s 2.0% target and 2.8% core inflation may not look dramatic. In reality, it is—inflation measures the erosion of purchasing power, and the central bank’s ability to control that erosion. At 2.8%, the loonie is eroding 40% faster than the central bank’s target. Being 40% off the mark is apparently only tolerable when it comes to banking and weather forecasting.
Being at this level is also problematic given what’s driving inflation pressures in Canada: shelter and food. Both categories that shape household expectations for all inflation, and are notoriously difficult for monetary policy to gracefully tame.
Canadian Shelter Inflation Slows After 4 Years of Elevated Increases
Much of Canada’s cost of living surge has been related to shelter costs, but that’s changing—slowly. CPI shelter saw 2.3% annual growth in November, decelerating from 2.5% a month prior. That’s not much relief in the context of shelter prices after showing annual growth at more than double the target rate for roughly 4 years. But its contribution to headline CPI is seriously slowing.
“The good news on that [housing affordability] front is that home prices continue to drift down nationally, market rents are easing, and of course interest rates have come down heavily since spring 2024,” explains BMO chief economist Douglas Porter.
He further notes this is far from “normal,” but he sees this segment of CPI calming further in the coming months. However, shelter’s ability to slow headline CPI is going to be challenged by another segment—food.
“Alas, the main villain of the inflation episode of 2021-23 has come roaring back onto the scene—food costs,” warns Porter.
Canadian Food Price Inflation Is Back—Just In Time For The Holidays
Source: BMO Capital Markets.
StatCan notes the fastest growing inflation segment is food. CPI food saw annual growth reach 4.2% in November, accelerating from 3.4% a month prior. Groceries are the main villain here, rising 4.7% from last year. November alone saw a 1.9% jump—the largest monthly increase since January 2023. StatCan attributes the rise primarily to physical supply shocks (e.g. weather impacting crops) and trade tariffs.
“That’s a big deal for monetary policy, as food prices are a key driver of inflation expectations,” warns Porter.
The role of food and shelter costs on general inflation expectations is much bigger than most realize. As these are non-discretionary expenses, an aggressive climb becomes more prominently in focus for end users. They aren’t just hearing inflation is rising—they’re seeing prices rise in an area they can’t easily cut back on.
Inflation expectations are a problem the Bank of Canada has specifically cited as a concern. When consumers and businesses expect inflation to rise aggressively, they’re prepared to more easily absorb higher prices. The cycle becomes stickier and more difficult to break, often requiring rate hikes steep enough to break the psychological cycle, not just throttle credit.
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