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A shopper leaves a Toronto supermarket with groceries in this file photo. Statistics Canada said Tuesday the annual rate of inflation eased to 6.3 per cent in December.Alex Lupul/The Canadian Press

Canada’s inflation rate eased in December alongside a steep drop in gasoline prices, an encouraging sign for the Bank of Canada as it considers further increases in interest rates.

It was the latest in a string of promising developments for inflation. The U.S. rate is continuing to fall, while prices for many resources – such as lumber and natural gas – have dropped. Companies in several industries have reported that supply chain disruptions – a key factor in recently driving up prices – are improving, too.

“Obviously, Canadians got a pretty big break in December, with the decline in gasoline prices. That left more money in the pockets of Canadians to spend elsewhere,” said Royce Mendes, head of macro strategy at Desjardins Securities, in an interview.

The Consumer Price Index rose 6.3 per cent in December from a year earlier, down from a 6.8-per-cent pace in the previous month, according to figures published Tuesday by Statistics Canada. Financial analysts were expecting an inflation rate of 6.4 per cent. CPI growth appears to have peaked at 8.1 per cent in June.

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Consumer prices fell 0.6 per cent during the month of December, highlighted by a 13-per-cent plunge for gasoline, the largest monthly decline at the pumps since the early stages of the COVID-19 pandemic.

Despite the improvement, Mr. Mendes cautioned that core measures of inflation were proving sticky and remained well above the Bank of Canada’s 2-per-cent target.

For instance, after excluding food and energy – two of the more volatile components of the CPI – prices rose 5.3 per cent on an annual basis, a slight deceleration from 5.4 per cent in November.

“The job is nowhere close to being done, just yet, in terms of getting inflation back to 2 per cent,” Mr. Mendes said.

Tuesday’s inflation report will be a key consideration for the Bank of Canada as it weighs whether to raise its policy rate for an eighth consecutive time on Jan. 25.

The central bank says it is nearing the end of its rate-hike campaign, with decisions now hinging on the quality of economic data. Many analysts expect the bank to hike its policy rate by 25 basis points to 4.5 per cent next week, particularly after strong job growth in December. (A basis point is 1/100th of a percentage point.) The key lending rate was locked at 0.25 per cent for close to two years, before the rate-hike cycle began in March, 2022.

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Higher interest rates appear to be having their intended effect, according to a pair of Bank of Canada surveys published on Monday. Consumers say they are reducing their spending in response to high inflation and rising interest rates, while a growing proportion report they are delaying purchases. Many companies, meanwhile, expect their sales to slow over the coming year.

There were signs of weaker consumption in Tuesday’s report. Price growth for durable goods is slowing quickly. For example, the cost of household appliances fell 4.1 per cent in December, the largest month-over-month decline on record. Furniture prices also dropped.

“These slowdowns in price growth occurred amid easing supply chain pressures and lower shipping costs, as well as softer demand,” Statscan said in its release.

At the same time, there are persistent aspects of lofty inflation. Grocery prices rose 11 per cent in December on an annual basis, down from 11.4 per cent in November. Those prices are still growing near the highest rates in several decades, a continuing frustration for consumers.

Mortgage interest costs have jumped 18 per cent over the past year, on account of the rapid rise in borrowing rates. Rents have risen 5.8 per cent over the year. Mortgages are now the largest contributor to the annual rate of inflation, with rents making the third-largest contribution.

In recent months, analysts have paid close attention to short-term trends in price growth to get a sense of how pressures are changing. Specifically, they have looked at the three-month change in core inflation, excluding food and energy, expressed at an annualized rate. In December, this measure dipped to 3.7 per cent.

Karyne Charbonneau, executive director of economics at CIBC Capital Markets, suggests also excluding mortgage costs from that calculation. That’s because the Bank of Canada is raising interest rates to tamp down inflation, although that is having the opposite effect for interest payments on home loans.

When mortgage interest is removed, the short-term trend for core inflation is about 2.5 per cent, she said.

“The good news is that inflation is easing, and that will become more noticeable when the big monthly increases seen this past spring start to drop out of the annual calculation this year,” Ms. Charbonneau wrote in a note to clients. “Moreover, core inflation excluding mortgage costs is growing at a pace much closer to target.”

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