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Latest statistics likely to give Bank of Canada room to move in the coming months

Canadian consumer prices eased at the start of this year, with progress on underlying pressures likely to give the Bank of Canada more room to start considering rate cuts in the coming months.

The consumer price index rose 2.9% in January from a year ago, following a 3.4% increase a month earlier, Statistics Canada reported Tuesday in Ottawa. That’s slower than the median estimate of 3.3% in a Bloomberg survey of economists, and marks the first time since June that the headline rate fell to within the central bank’s target range.

On a monthly basis, the index was unchanged, versus expectations for an increase of 0.4% and following a 0.3% decline in December.

The Bank of Canada’s two preferred core inflation measures both decelerated, averaging 3.35% from a downwardly revised 3.6% a month earlier, also slower than the 3.6% pace expected by economists. A three-month moving average of the rates fell to an annualized pace of 3.22% from 3.63% in December, according to Bloomberg calculations.

January’s inflation data showed further disinflation progress after a stall at the end of last year. With the Bank of Canada now weighing how long its policy rate needs to remain restrictive, this report will help alleviate some concerns over the persistence of underlying inflation and the sluggish pace toward its 2% inflation target.

During their January deliberations, Governor Tiff Macklem and his officials viewed the current stance of monetary policy as sufficiently restrictive to achieve the target and said more time is needed to restore price stability. They expect inflation to remain around 3% in the first half of this year before gradually easing and reaching the target next year.

This is the only inflation report before the next rate decision on March 6. Economists widely expect officials to hold policy rates at 5% for a fifth straight meeting, and predict the easing cycle to start around mid-2024.

In January, the largest contributor to headline deceleration was lower year-over-year prices for gasoline, which were down 4%. Excluding gasoline, the index slowed to 3.2% from a year ago and down from 3.5% in December.

Slowing grocery inflation and lower prices for airfares and travel tours also contributed to the deceleration.

Four components in the CPI basket — food, shelter, health and personal care and alcoholic beverages and tobacco and cannabis products — grew at a rate above 3%. Collectively, they made up about 55% of the basket weights.

Inflation excluding food rose 2.7%, while excluding food and energy, it increased 3.1%.

Mortgage interest costs and rent remained the biggest contributors to year-over-year price gains. Mortgage interest costs jumped 27.4% from a year ago and rent rose 7.9%. Excluding shelter costs, the consumer price index rose 1.5% from a year ago.

Policymakers have said they are concerned shelter inflation would keep overall price gains elevated. If the housing market rebounds more than expected in the coming months, shelter prices could keep overall inflation above the target even while price pressures in other parts of the economy abate.

Regionally, prices increased at a slower pace from a year ago compared with December in nine of 10 Canadian provinces.

Alberta was the only province with faster price growth, partly due to higher electricity prices compared with December as a result of a base-year effect. The large monthly decline in January last year when Albertan households received rebates on their electricity bills is no longer affecting the year-over-year movement.

Copyright Bloomberg News

Source: Wealth Professional