Inflation continued to decelerate in January.

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'Big step in the right direction': What economists are saying about inflation and the Bank of Canada Back to video

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Statistics Canada reported on Feb. 21 that the consumer price index rose 5.9 per cent year over year last month. The January slowdown represents the third consecutive deceleration since October. Analysts had forecast an increase of 6.1 per cent.

On a monthly basis, the consumer price index rose 0.5 per cent in January, up from a 0.6 per cent drop in December. Statistics Canada attributed the increase to higher gasoline prices “related to refinery closures in the southwestern United States,” and the rising cost of mortgages and meat.

The national data agency recorded price slowdowns in several categories including cellphone services, vehicle sales and housing replacement costs, based on the falling price for homes.

Food, however, continues to be an inflation sticking point. Prices for groceries rose 10.4 per cent year over year, up from a December increase of 10.1 per cent. Mortgage costs, also a big ticket item, rose 21.2 per cent year over year in January, “the largest increase since September 1982, following an 18 per cent increase in December,” Statistics Canada said.

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

Economists seem to think January’s results will give the Bank of Canada enough breathing room to stick to its conditional pledge to pause rate hikes.

“Overall, this milder report will provide the BoC with some comfort on their decision to move to a conditional pause,” said Douglas Porter, chief economist at Bank of Montreal, 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.

Stephen Brown, Capital Economics

“The downside surprise occurred despite a much larger 1.1 per cent month over month rise in food prices than we had assumed, while gasoline prices rebounded by 4.7 per cent month over month. Core prices rose by just 0.1 per cent month over month — the smallest increase since February 2021. The 0.5 per cent month over month fall in clothing prices is hard to square with the unseasonably warm weather, which should have boosted demand for full-priced spring clothing and weighed on demand for discounted winter sale clothing. The 0.3 per cent month over month fall in household operations, furnishings and equipment prices suggests that easing supply shortages are feeding through. The other good news was that the upward revisions to core inflation that Stats Can flagged last month were not as large as initially indicated, with CPI-median revised up by 0.2 percentage points in December and CPI-trim left unrevised. Either way, both fell by 0.2 percentage points in January as we had expected.

“Core prices only inched up in January, which contributed to a larger-than-expected fall in headline inflation. That reinforces our view that the Bank of Canada is unlikely to follow the Federal Reserve in hiking interest rates further.”

Andrew Grantham, CIBC Economics

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

“Headline CPI rose by 0.5 per cent not seasonally adjusted in January, with the annual rate easing to 5.9 per cent, from 6.3 per cent in the prior month. Both the monthly increase and annual rate were a couple of ticks below consensus expectations, as big declines in air transportation and telephone service costs partially offset the expected gains in gasoline and mortgage interest. Excluding food/energy, CPI rose by a mere 0.1 per cent seasonally adjusted in January, and would be weaker still excluding the big increase in mortgage interest costs. However, the BoC’s core measures of inflation remained higher than policymakers would like, with newly released monthly data suggesting that both trim and median were tracking around a 3.5 per cent annualized pace over the past three months.”

Douglas Porter, BMO Economics

“Today’s CPI represents a rare downside surprise in both headline and core inflation, clearly a big step in the right direction. While there were some one-off factors helping out, there were also numerous special factors on the way up last year — so we were due for some better inflation luck, with a cooling economy and improved supply chains also contributing. Even the short-term metrics on core inflation are getting into a much more manageable zone, which should soon trim the annual rates from their five per cent perch. Overall, this milder report will provide the BoC with some comfort on their decision to move to a conditional pause, acting as a strong antidote to the run of robust growth figures seen in recent weeks.”

James Orlando, TD Economics

“January’s CPI report showed that inflation continues to cool in Canada. Headline and core measures are falling on a year-on-year basis and should decline even further over the coming months as the base effect of last year’s first half price surge washes out of the data.

“For the Bank of Canada, it will need to see this trend continue for it to be comfortable remaining on the sidelines. As we highlighted in our Quarterly Economic Forecast, a slowing in economic momentum will be needed for inflation to decisively fall back towards the one per cent to three per cent target range. The recent uptick in employment and spending data complicate this. But given the improvement in inflation data today, the BoC will not feel rushed to jump back in with another rate hike just yet.”

Claire Fan, RBC Economics

“The rapid increase in commodity prices and supply chain disruptions that drove much of the initial surge in inflation last year has continued to ease. Commodity prices for agriculture, metal and energy products have all been tracking lower and closer to their pre-pandemic levels. And shipping time and costs have fallen considerably. Domestically-driven price pressures have also shown early signs of easing, albeit at a more moderate pace.

“The 3-month average growth in the Bank of Canada’s preferred median and trim inflation measures – designed to look through volatility in individual product prices to better gauge underlying price pressures – are running at around 3.5 per cent on a three-month annualized basis. That’s still above the BoC’s one per cent to three per cent inflation target but are well below peak levels last year. Firmer labour market data (Canada added a strong 150,000 jobs in January) and resilience in household spending reaffirm that further easing in inflation pressures will likely be slower than the declines to-date. But the impact of interest rate hikes over the last year will continue to flow through to increase household debt payments and slow spending this year. We continue to expect the BoC to hold the overnight rate at 4.5 per cent, until the end of this year.”

Matthieu Arseneau and Alexandra Ducharme, National Bank of Canada Economics

“This morning’s data comfort our view that the Bank of Canada should maintain its pause following 2022’s extremely aggressive tightening. The actions taken so far will continue to dampen economic activity in the quarters ahead and, consequently, inflationary pressures. While GDP and the labour market have remained healthy lately, the economic outlook is darkening as a sizable share of businesses expect a drop in their volume sales according to January’s (Bank of Canada) Business Outlook Survey. The recent decline in active businesses also does not bode well for hiring in the coming months. While it may take longer for services inflation to return to normal levels, there is reason to believe that the labour market will loosen up in a weak growth environment, contributing to a reduction in wage pressures. Meanwhile, we are very optimistic about goods where deflation cannot be ruled out with higher inventories compared to earlier during the pandemic, significantly lower freight costs, sales price cuts by Chinese producers and the global economic slowdown.”

Jay Zhao-Murray, FX market analyst at Monex Canada

“This is a considerably stronger print than we got in December, and while the headline measure continues to tick down, the sequential (month-over-month) figure will definitely get some attention at 234 Wellington St (Bank of Canada address in Ottawa). With monetary policy lags, falling producer prices, and softer commodity prices continuing to indicate that disinflation is in the pipeline, it is likely that the Bank of Canada will look through this singular inflation print, especially given January’s strong guidance on halting their hiking cycle. This view is compounded by the fact that the main driver of the uptick in monthly inflation, food, is highly volatile and outside the influence of domestic monetary policy. Additionally, seasonal factors likely played a positive role in the headline data following January’s heatwave, while further moderation in the BoC’s core measures also suggests that further tightening may not be necessary.

“For the BoC to restart its hiking cycle, governor (Tiff) Macklem said they need to see substantial evidence that its three per cent forecast by year-end will be surpassed. We calculated that a monthly inflation rate of +0.25 per cent over 12 consecutive months would have been consistent with that forecast. For that reason, a +0.5 per cent increase raises some eyebrows as one or two more prints of this strength will make three per cent a challenging target without further hikes.”

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