Canada January inflation lowest in 3 years

Canada's annual inflation rate in January was at its lowest since 2009 and retail sales plunged unexpectedly in December, shining light on how little pressure there is on the Bank of Canada to raise interest rates amid a sluggish domestic economy.

January CPI held at 0.5 per cent from 0.8 per cent in December to notch its weakest level since October 2009, while retail sales dove 2.1 per cent in December. The drop in retail sales was far worse than market forecasts of a 0.3 per cent decline, and marked its biggest monthly decline in more than two years.

That decline in retail sales was "a very significant disappointment" relative to the market and against expectations for consumer spending, David Tulk, chief Canada macro strategist at TD Securities, shortly after the release of the data.

"That and an environment where CPI is quite benign and core inflation is at the bottom of the Bank of Canada's target range means that we're struggling through a pretty significant soft patch in the Canadian economy," he said.

"What this means for the Bank of Canada is that lower for longer is the right approach."
The main factor behind the smaller increase in the CPI was gasoline prices, which fell 1.8 per cent year-over-year in January after rising 1.0 per cent in December, Statistics Canada said on Friday.

The rate is far below the Bank of Canada's 2.0 per cent target.  The bank tries to keep underlying inflation between 1 and 3 per cent, and the measure of underlying inflation right now is exactly one per cent, said Doug Porter, chief economist at BMO Capital Markets.

Porter said the rate is one of the lowest inflation rates in the world. Among the 40 largest economies, only Japan, Sweden, Switzerland and Greece have lower inflation at the moment. The headline figure can be characterized as "non-threatening," he said.

"What does it mean? It means they (Bank of Canada) certainly are not going to be raising interest rates. In fact there is growing talk they might be compelled to cut interest rates. I personally don't believe it, but there are some questions over what it would take to get the bank to cut rates."

The central bank's closely watched annual core inflation rate, which strips out volatile items such as gasoline, dropped to 1.0 per cent from 1.1 per cent in December.

Excluding gas, the CPI increased 0.6 per cent in the 12 months to January after rising 0.8 per cent in December. This slower increase was led by year-over-year price declines for clothing and smaller price gains for food purchased from stores, Statscan said.

Auto-related sales were a big drag on retail sales. As well, seven of the 11 retail categories notched declines in December, representing 58 per cent of total retail trade. Weakness was noted in most Most store types typically associated with holiday shopping registered weaker sales in December.