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Despite the Bank of Canada recently suggesting we could be at the end of the rate-hike cycle, inflation data appears to be keeping an additional rate hike in play.

November’s headline CPI inflation rate came in at an annualized rate of 6.8%, a tick down from 6.9% in October and a tick above expectations.

Core inflation, however, which strips out more volatile food and energy prices, rose to 5.4% from 5.3% in October.

The impact of rising interest rates

The Statistics Canada data showed overall inflation was driven in part by growth in shelter costs.

Thanks to the rapid rise in interest rates experienced this year, mortgage interest costs grew at a rate of 14.5% in November, the largest increase since 1983.

Overall rent prices were up 5.9% year-over-year, with the highest increases seen in Prince Edward Island (+12.6%) and British Columbia (+7.2%).

One category that saw an improvement in prices was related to the cost of new homes, which continued to decelerate in the month due to the decline in new home prices.

Source: Statistics Canada

A follow-up rate hike in January is possible

While overall inflation continues to trend lower, stubbornly high core inflation is sure to grab the attention of the Bank of Canada, which said its future rate decisions will be more data-dependent.

The Bank will receive December inflation data before its next monetary policy meeting on January 25, 2023. Given that so much depends on the economic data that will be released between now and then, remain split over when and if a further rate hike is coming.

“Turning the temperature down on inflation is proving to be an achingly slow process, and we suspect this may be a theme for 2023,” wrote BMO chief economist Douglas Porter. “The fact that many measures of core inflation are still nudging higher is a clear warning sign of persistent underlying pressures. We are leaning to the view that the Bank of Canada hikes rates one more time in January to 4.5%, and this firm report does nothing to doubt that call.

Others think the Bank will pause next month, but that a future rate hike is still in the cards further into the year.

“We continue to anticipate that the central bank will pause its hiking cycle in January, in large part because the Canadian economy has yet to feel the full dampening effects of this year’s rate hikes. However, this data print keeps the door open to one more rate increase,” noted Desjardins economist Marc Desormeaux.

“Looking ahead, next month’s labour market print for December will be critical in assessing the strength of the underlying economy and wage pressures, as well as the future course of interest rates,” he added.

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