Canada’s annual inflation rate slowed in January, serving good news for the BoC

OTTAWA – The annual inflation rate slowed more than expected in January, suggesting the Bank of Canada is likely content with its decision to pause rate hikes as price pressures continue to ease.

In its consumer price index report released Tuesday, Statistics Canada said the deceleration in headline inflation to 5.9 per cent in January from 6.3 per cent in December reflects a base-year effect.

A base-year effect refers to the impact of price movements from a year ago on the calculation of the year-over-year inflation rate.

Given much of the acceleration in price growth happened in the first half of 2022 as the threat of Russia invading Ukraine turned into a reality, the federal agency said the annual inflation rate will continue to slow in the coming months.

12-month change in the Consumer Price Index (CPI) and CPI excluding food and energy

The last time Canada’s annual inflation rate was below six per cent was in February 2022 when it was 5.7 per cent.

The headline rate came in lower in January than many commercial banks were anticipating in their forecasts, signalling good news for the Bank of Canada.

Last month, the Bank of Canada hiked its key interest rate for the eighth consecutive time since March 2022, bringing it from near zero to 4.5 per cent. That’s the highest it’s been since 2007. At the time, the central bank said it would take a “conditional” pause to assess the effects of higher interest rates on the economy.

Slowdown in headline inflation reflects a base-year effect following strong price increases in January 2022 (Source: Statistics Canada)

In an interview, BMO chief economist Douglas Porter said the positive surprise in Tuesday’s report was “very welcome,” but noted some of the decline in headline inflation had to do with one-off events. For example, prices for cellular services were down because of extended Boxing Day sales.

“On balance, this slightly takes the pressure off of the Bank of Canada,” Porter said, adding that another hike at the central bank’s next rate decision on March 8 is most likely off the table.

Gasoline prices increase month over month (Source: Statistics Canada)

On a monthly basis, higher gasoline prices in January drove the overall price level higher compared with December. The federal agency said the consumer price index rose 0.5 per cent in January after declining by 0.6 per cent a month prior.

According to its most updated forecast, the Bank of Canada anticipates the annual inflation rate to fall to about three per cent by mid-year. A return to its two per cent target is expected in 2024.

So long as the economy and inflation evolve in line with the Bank of Canada’s forecasts, the central bank estimates it won’t need to raise rates further.

Though Canadians will start seeing the headline rate fall more noticeably in the coming months – barring unexpected global events – economists have noticed price pressures easing for months now.

Prices rise at a slower pace in January in all major components except food and health and personal care (Source: Statistics Canada)

According to BMO, the three-month annualized inflation rate is hovering at about 2.4 per cent, suggesting inflation is headed toward target.

But from an affordability standpoint, RBC economist Claire Fan said “the pain is still there,” given higher prices are already baked into the economy.

“It’s really hard to wrap our heads around the idea that lower inflation doesn’t equal outright deflation,” Fan said.

Though headline inflation is inching closer to target, Canadians saw no slowdown in the cost of groceries last month as prices rose faster on a year-over-year basis.

Grocery prices were up 11.4 per cent compared with a year ago, marking an acceleration from 11 per cent in December. The federal agency said prices for meat, bakery goods, and vegetables all rose faster.

Porter said the food inflation was the “one piece of bad news” in the January inflation report.

Prices accelerate for various food items (Source: Statistics Canada)

The chief economist stressed that soaring grocery prices is a global phenomenon, noting it is “not a Canadian story alone.”

Some factors playing into this, he said, include avian flu affecting poultry products and the war in Ukraine affecting vegetable oil and grain prices.

Fan said although Canadians have yet to see grocery prices ease, lower commodity prices will eventually feed through the supply chain to retail prices.

“It’s just taken a bit longer than many had expected.”

This report by The Canadian Press was first published Feb. 21, 2023.

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