Canada Inflation Rate Cools More Than Forecast

Zi Cheng

Traders' Opinions

Economic

Forex

Summary:

In January, Canada experienced a more pronounced than anticipated decrease in its annual inflation rate, primarily driven by reduced expenditures on gasoline by consumers and a continued deceleration in the rate of grocery price hikes.

At the onset of the year, Canadian consumer prices experienced a moderation, indicating progress in alleviating underlying pressures. This development is likely to grant the Bank of Canada increased flexibility to consider potential rate cuts in the near future.

According to Statistics Canada's report in Ottawa on Tuesday, the consumer price index climbed by 2.9% in January compared to the previous year, a deceleration from the 3.4% rise registered in the preceding month. This figure fell below the median estimate of 3.3% projected by economists in a Bloomberg survey and marks the first instance since June that the headline rate has fallen within the central bank's target range.

Canada Inflation Rate Cools More Than Forecast_1

On a monthly basis, the index remained unchanged, contrary to expectations of a 0.4% increase, following a 0.3% decline in December.

Both of the Bank of Canada's preferred core inflation measures exhibited a slowdown, averaging 3.35% compared to a downwardly revised 3.6% in the previous month, also lower than the 3.6% pace anticipated by economists. Bloomberg calculations indicate that a three-month moving average of these rates dropped to an annualized pace of 3.22% from 3.63% in December.

The January inflation data reflects further progress in disinflation following a stagnation at the end of the previous year. As the Bank of Canada evaluates the necessity of maintaining its policy rate at restrictive levels, this report is expected to alleviate concerns regarding the persistence of underlying inflation and the sluggish progression towards the 2% inflation target.

During their January discussions, Governor Tiff Macklem and other officials deemed the current monetary policy stance as adequately restrictive to attain the target, emphasizing the need for more time to restore price stability. They anticipate inflation to hover around 3% in the first half of the year before gradually subsiding and aligning with the target by the following year.

This report serves as the sole inflation update preceding the next rate decision scheduled for March 6. Economists widely anticipate officials to maintain policy rates at 5% for a fifth consecutive meeting, with the easing cycle projected to commence around mid-2024.

In January, the primary contributor to the deceleration in headline inflation was the decline in year-over-year gasoline prices by 4%. Excluding gasoline, the index moderated to 3.2% from the previous year, down from 3.5% in December.

The slowdown in grocery inflation, along with reduced airfare and travel tour prices, also contributed to the overall deceleration.

Among the components of the CPI basket, namely food, shelter, health and personal care, alcoholic beverages and tobacco, and cannabis products, four experienced growth rates above 3%, collectively constituting approximately 55% of the basket weights.

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

Mortgage interest costs and rent remained the primary drivers of year-over-year price increases, with mortgage interest costs surging by 27.4% and rent rising by 7.9%.

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Canada Inflation Rate Cools More Than Forecast

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