Canadian Inflation Cools to 2.9%, Easing Pressure on Bank of Canada
Consumer Price Index Rises at Slowest Pace Since Early 2021, but Underlying Price Pressures Remain
OTTAWA — Canada’s annual inflation rate cooled more than expected in January, dropping to 2.9% as lower gasoline prices provided significant relief to consumers, Statistics Canada reported Tuesday. The decline from December’s 3.4% rate marks the first time the Consumer Price Index (CPI) has fallen within the Bank of Canada’s 1-3% target range since June 2023.
The deceleration was largely driven by a sharp 4.0% month-over-month decline in gasoline prices, reflecting lower global oil costs. However, economists and policymakers are cautioning that the journey back to the central bank’s 2% target is far from over, as price pressures in key areas of the economy remain stubbornly high.
Key Drivers of the Slowdown:
- Gasoline Prices: The most significant factor, providing the largest downward contribution to the year-over-year inflation rate.
- Durable Goods: Prices for goods like furniture and appliances continued to ease, a sign that supply chain improvements and softening consumer demand are having an effect.
- Airfares: Prices for air transportation fell significantly month-over-month, following the seasonal holiday surge.
Persistent Sticky Spots:
Despite the headline decline, the “core” of inflation—which the Bank of Canada watches closely—remained elevated, suggesting underlying price pressures are still present.
- Grocery Prices: While the pace of increase slowed slightly, food prices remained high, rising 5.4% year-over-year.
- Shelter Costs: This category continued to be the largest upward contributor to inflation. Mortgage interest costs soared due to higher interest rates, and rents continued to climb rapidly.
- Core Inflation Measures: The Bank of Canada’s preferred core measures (CPI-median and CPI-trim), which strip out volatile components, remained stubbornly high, hovering around 3.3-3.4%. This indicates that broad-based inflationary momentum is still persistent.
Implications for the Bank of Canada:
The sharper-than-expected drop in headline inflation is welcome news for the central bank, which has raised its key interest rate to a 22-year high of 5.0% to combat inflation. It reinforces the bank’s current decision to hold rates steady and will fuel debate about the timing of future rate cuts.
However, Governor Tiff Macklem and his governing council have been clear that they need to see sustained evidence that core inflation is easing before they consider lowering borrowing costs. The stickiness in shelter and core measures suggests the Bank will maintain its conditional pause for the foreseeable future.
What Economists Are Saying:
“The door to rate cuts is opening, but the Bank of Canada isn’t walking through it yet,” said Avery Shenfeld, chief economist at CIBC Capital Markets. “The encouraging drop in headline CPI is a start, but the Bank will need to see this confirmed in the core measures over the next few months before it can sound the all-clear.”
The Bottom Line:
While falling gas prices have given Canadians a break at the pump and helped pull down the overall inflation rate, the cost-of-living crisis is not over. The path back to 2% inflation is expected to be slow and bumpy, with high mortgage payments and grocery bills continuing to strain household budgets. The Bank of Canada is likely to remain on hold, watching the data closely, with most market expectations for the first rate cut now focused on the middle of the year.