Canada’s inflation rate slowed to 2.9 per cent in January, marking the first time since June that it has fallen within the Bank of Canada‘s target range of one to three per cent.

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The deceleration, from a rate of 3.4 per cent in December, was sharper than the 3.3 per cent reading expected by economists and the 3.2 per cent mark forecast by the central bank itself.

Statistics Canada said the decline in the pace of inflation was mostly because of a year-over-year decline in gasoline prices.

Excluding gasoline, the consumer price index grew by only 3.2 per cent in January, down from 3.5 per cent in December, it said.

“There is a lot to like in today’s inflation release,” said Randall Bartlett, senior director of Canadian Economics at Desjardins.

Among the positive signs was an easing in food inflation, with food prices growing just 0.1 per cent from December, the weakest month-over-month increase since March 2021.

While still elevated, the year-over-year increase in grocery prices fell to  3.4 per cent in January compared with 4.7 per cent in December, putting downward pressure on the all-items CPI.

“The effect of past rate hikes feed into consumer prices persistently with a lag,” Royal Bank of Canada economist Abbey Xu said.

Olivia Cross, North America economist at Capital Economics, said the Bank of Canada will be pleased with January’s inflation report, and not just because the headline rate slowed more than expected.

The central bank’s core measures of inflation, which strip out volatility in prices, also fell in January. CPI-trim and CPI-median clocked in below expectations at 3.4 per cent and 3.3 per cent year-over-year growth, respectively.

CIBC economist Andrew Grantham noted that discretionary spending was slipping and the drop in demand finally appears to be affecting prices.

Conference Board of Canada researcher Kiefer Van Mulligen noted survey evidence from the Bank of Canada that shows consumers have pared back their price growth expectations for many goods, but many expect price growth for specific services, including rent, entertainment and meals at restaurants, to remain elevated.

“This fits with consumers’ recent experience,” he said.

Lower prices for airfares and travel tours also contributed to the headline deceleration. Prices for airfares fell 14.3 per cent in January, compared with a 9.7 per cent decline in December on a year-over-year basis.

Airfares typically decline in January as heightened holiday demand subsides, the statistics agency said. On a monthly basis, prices fell 23.7 per cent in January compared with a 31.1 per cent gain in December.

“That is a positive sign for the Bank of Canada, and will have financial markets pulling forward expectations for a first interest rate cut today, which we see being delivered in June,” said Grantham.

Tuesday’s reading will be the last inflation report before the Bank of Canada’s next rate decision on March 6. The central bank is widely expected to hold its policy rate steady at five per cent with cuts to begin by mid-year.

RBC’s Xu said the most likely path for inflation going forward is still lower with per-capita GDP and consumer spending continuing to decline.

The strong start to 2024 for job markets gives the central bank more leeway to wait for firmer signs that inflation is getting back under control before pivoting to interest rate cuts, she said.

The economist doesn’t believe policy makers should be in a rush to start cutting.

“As of now, our base case assumes the BoC starts to lower interest rates around mid-year,” she said.

After Tuesday’s data, markets pulled forward their bets on the timing of the first interest rate cut, putting almost even odds on the April meeting, up from about 25 per cent previously.

Additional reporting by Bloomberg.

• Email: dpaglinawan@postmedia.com

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