Canada’s inflation rate continued to ease in December, despite upward pressure from rising rents and mortgage interest costs.

The Consumer Price Index eased to an annual growth rate of 6.3% last month, thanks largely to a decline in gas prices. That’s down from 6.8% in November and what now appears to be the peak of 8.1% in June.

For the full year, consumer prices rose by 6.8%—the highest rate of price growth in Canada since 1982.

“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,” noted CIBC’s Karyne Charbonneau. “Moreover, core inflation excluding mortgage costs is growing at a pace much closer to target.”

Two key yearly measures tracked closely by the central bank — trim and median core rates — continued to decelerate as well, falling to 5.3% and 5%, respectively.

“Canadians continue to feel the pinch, but December was one of the most optimistic prints yet in the long and painful fight for price stability,” Desjardins economist Marc Desormeaux noted. “Further softening in the Bank of Canada’s measures of underlying inflation suggests that the economic drag created by higher interest rates is indeed having its desired effect.”

Mortgage interest costs up 18%

Economists at National Bank noted that month-over-month inflation came in at 0.28%, its lowest pace in 13 months, and “would have been lower had it not been for the ongoing spike in mortgage interest costs (MIC), primarily due to central bank tightening.”

Mortgage interest cost was up 18% year-over-year, up from a pace of 14.5% in November. Overall shelter costs were up 7% year-over-year, down 7.2% a month earlier.

Some shelter costs continued to ease, including homeowners’ replacement cost (+4.7%), which is related to the cost of new homes, and other owned accommodation expenses (+2.5%), which includes real estate commissions.

What it means for next week’s Bank of Canada decision

Despite the Bank of Canada implying it could pause its monetary policy tightening following its 50-bps rate hike in December, all signs are pointing to one more quarter-point hike next week.

Core inflation remains stubbornly high and the labour market remains strong, particularly after adding another 104,000 jobs last month (85,000 of which were full-time).

“If the Bank has shifted to a ‘data-dependent’ rate-raising approach, a quarter-point rate increase later this month seems likely,” the Conference Board of Canada noted. “It takes time for the full inflation-fighting impact of higher rates to kick in, but Bank officials have stressed that they won’t take any chances in getting inflation down sooner to avoid greater pain later.”

Markets are pricing in a 25-bps hike next Wednesday, and most economists seem to agree.

“Despite signs from the consumer and business surveys that Canadians are tightening their belts as they brace for recession, the battle against inflation has not turned enough for the BoC to declare victory,” TD Economics’ Leslie Preston noted.

“We expect the Bank will make one last quarter-point hike next week, and then pause to assess the cumulative impact of a year of dramatic tightening on the economy.”