Inflation Slows in Canada: What Economists Are Saying

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Inflation continued to decelerate in January.

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Statistics Canada reported on February 21 that the consumer price index rose by 5.9 percent year-on-year last month. January’s slowdown marks the third straight slowdown since October. Analysts had predicted a 6.1 percent increase.

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The national data agency saw price slowdowns in several categories, including mobile services, vehicle sales and housing replacement costs, on the back of falling home prices.

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However, the food still remains inflation sticking point. Food prices rose by 10.4 percent year-on-year from a 10.1 percent increase in December. The cost of mortgages, also a big item, rose 21.2 percent in January from a year earlier, “the biggest increase since September 1982, after an 18 percent increase in December,” Statistics Canada said.

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In her inflation note, RBC economist Claire Fan said there were signs that food prices could begin to moderate in the coming months. “Lower agricultural commodity prices and easing global supply chain pressures are expected to moderate food price growth this year,” she said.

Economists seem to believe that the January results will deliver Bank of Canada plenty of room to breathe honor its contingent commitment to suspend rate hikes.

“Overall, this more dovish news will provide some comfort to the BoC in their decision to move to a conditional pause,” Douglas Porter, chief economist at Bank of Montreal, said in a note to investors.

Here’s what economists are saying about the latest inflation numbers and what they mean for the Bank of Canada and interest rates.

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Stephen Brown, Capital Economics

“The downside surprise came despite a much larger 1.1 percent month-on-month increase in food prices than we had anticipated, while gasoline prices rebounded 4.7 percent month-on-month.” Core prices rose just 0.1 percent month-on-month — the smallest increase since February 2021. A month-on-month decline in clothing prices of 0.5 percent can hardly be offset by unusually warm weather that should have fueled spring demand at full prices. clothing and weighed on demand for discounted winter clothing sales. A month-on-month drop of 0.3 percent in prices for household appliances and equipment suggests that the easing supply shortage is taking effect. In other good news, the upward revisions to core inflation that Stats Can flagged last month were not as large as initially suggested, with median CPI revised up 0.2 percentage points in December and CPI-trim left unchanged. Either way, both fell 0.2 percentage points in January, as we expected.

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“Core prices rose only in January, contributing to a larger-than-expected decline in headline inflation. This confirms our view that the Bank of Canada is unlikely to follow the Federal Reserve in raising interest rates further.

Andrew Grantham, CIBC Economics

“Today’s data is evidence that inflation is coming under control, even as economic growth continues to hold up better than expected in the face of higher interest rates, creating a confusing picture for the Bank of Canada.

“The headline CPI rose a seasonally adjusted 0.5 percent in January, with the annual rate easing to 5.9 percent from 6.3 percent in the previous month. Both the monthly increase and the annual rate were a few ticks below consensus expectations, as large declines in the cost of air travel and phone services partially offset expected gains in gasoline and mortgage interest. Excluding food/energy, the seasonally adjusted CPI rose just 0.1 percent in January and would have been weaker had it not been for a big rise in mortgage interest costs. But the BoC’s core inflation rates remained higher than policymakers would have liked, with newly released monthly data suggesting both the trim and the median tracked an annual pace of around 3.5 percent over the past three months.

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Douglas Porter, BMO Economics

“Today’s CPI represents a rare negative surprise in headline and core inflation, clearly a big step in the right direction. While there were some one-off factors that helped, there were also a lot of odd factors on the way up last year – so we should have had better inflation luck, helped by a cooling economy and better supply chains. Even short-term measures of core inflation are moving into a much more manageable range, which should soon reduce annual rates from five percent. Overall, this softer report will provide some comfort to the BoC in their decision to move to a conditional pause and will act as a strong antidote to the string of strong growth figures seen in recent weeks.”

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James Orlando, TD Economics

“January’s CPI report showed inflation continues to cool in Canada. The headline and core indicators are down year-on-year and should decline further in the coming months as the data washes out the underlying effect of last year’s first-half price increase.

“As for the Bank of Canada, this trend will have to continue to stay out. As we highlighted in our Quarterly Economic Forecast, a slowdown in economic momentum will be needed for inflation to fall decisively back to the target range of one to three percent. The recent surge in employment and spending data complicates this. But given the improvement in inflation data today, the BoC will feel no rush to return to another rate hike.”

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Claire Fan, RBC Economics

“The rapid rise in commodity prices and supply chain disruptions that caused much of the initial rise in inflation last year continued to moderate. Commodity prices for agriculture, metals and energy products are moving lower and closer to pre-pandemic levels. And the delivery time and cost have been greatly reduced. Domestic price pressures also showed early signs of easing, albeit at a more moderate pace.

“Three-month average growth in the Bank of Canada’s preferred median and trim inflation gauge — designed to examine product price volatility to better measure underlying price pressures — is around 3.5 percent on an annual three-month basis. That’s still above the BoC’s one to three percent inflation target, but well below last year’s peak levels. More accurate labor market data (Canada added a strong 150,000 jobs in January) and resilience in household spending reaffirm that further easing of inflationary pressures is likely to be slower than the declines to date. However, the impact of interest rate increases over the past year will continue to translate into increased household debt payments and a slowdown in spending this year. We continue to expect the BoC to hold the overnight rate at 4.5 percent until the end of this year.

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