Yahoo Finance Inflation in Canada slows with 2.9% increase in January, keeping June rate-cut expectations on track
Canada’s annual rate of inflation slowed more than economists expected in January, with prices rising 2.9 per cent, as food price growth slowed and gas prices fell.
Economists had expected the Consumer Price Index (CPI) to dip from 3.4 per cent in December to 3.3 per cent in January, according to Reuters.
Statistics Canada said on Tuesday that January's annual deceleration was driven by lower year-over-year prices for gasoline. Excluding gasoline, the Consumer Price Index (CPI) slowed to 3.2 per cent in January.
The deceleration brings inflation back within the Bank of Canada's target range of between one and three per cent. The central bank's measures of core inflation also slowed in January, a sign that underlying price pressures are easing.
Economists widely expect the central bank to begin cutting rates later this year. Bank of Canada Governor Tiff Macklem said last month that the central bank needs "more assurance" that inflation is losing steam before it will consider easing monetary policy.
"While no doubt welcome news, the Bank of Canada will likely remain cautious in the face of still-strong wage gains, firm services prices, and the reality that core inflation is still holding above 3 per cent," BMO chief economist Douglas Porter wrote in a research note on Tuesday.
"But clearly today's result makes rate cuts much more plausible in coming months, and we remain comfortable with our call that the Bank will begin trimming in June."
Desjardins macro strategist Tiago Figueiredo wrote in a note that underlying inflation has been making more progress than the central bank has been willing to concede.
"Overall, price growth is clearly moving in the right direction," Figueiredo wrote.
"As a result, we continue to see the first of five rate cuts this year occurring in June, with risks tilted towards an easing cycle beginning earlier rather than later."
Money markets hiked bets for a rate cut in April to as much as a 58 per cent chance on Tuesday. Before the CPI report was released, markets had priced in a 33 per cent chance of an April cut.
Karl Schamotta, chief market strategist at Corpay, wrote in a research note that "traders anticipate a faster and more aggressive easing cycle" following Tuesday's data release.
"Policymakers still look likely to keep their powder dry until after the March rate-setting meeting, with more data needed to confirm underlying trends," he said.
Gas prices fell 4 per cent in January on an annual basis, largely due to a base-year effect that saw higher gas prices last year due to refinery closures in the southern United States.
Food prices continued to rise at a slower rate, with grocery store prices increasing 3.4 per cent in January. Statistics Canada said the deceleration of grocery prices was broad-based, with meat (up 2.8 per cent), dairy products (up 1.5 per cent), bakery products (up 4 per cent) and fresh fruit (up 1.9 per cent) contributing to the slower year-over-year increase.
Prices fell in five of the eight components on a monthly basis. Health and personal care stayed flat with a 3.7 per cent increase, while shelter costs accelerated from a 6 per cent rise in December to 6.2 per cent in January.
On a monthly basis, CPI was unchanged in January, following a 0.3 per cent decline in December. Seasonally adjusted, CPI fell 0.1 per cent, the first decline since May 2020.
"Overall, it appears that the sluggishness in consumer demand is finally impacting pricing in areas of more discretionary spending," CIBC economist Andrew Grantham wrote in a research note on Tuesday.
"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."
With files from Reuters.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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