MNI: Canada CPI Below Forecast, Core Rates Lowest Since 2021

Canada got its first optimistic inflation report in a while with headline prices slowing more than expected and coming back within the central bank's target band while core indexes had the smallest gains since 2021, figures that may allow policymakers at their meeting next month to express some confidence that the balance of risks is shifting to cutting interest rates.

Statistics Canada said Tuesday the consumer price index slowed to 2.9% in January from a year ago compared with December's 3.4% and the economist consensus of 3.2%. Prices were unchanged on a monthly basis, also less than the consensus for a 0.4% increase, and on a seasonally adjusted basis they declined for the first time in almost four years. 

While some of the price moderation can be written off as a "base effect" coming from a flattering comparison to gasoline prices 12 months ago, core inflation rates also showed unexpected weakness. The "median" rate slowed to 3.3% from 3.5% and the "trim" rate to 3.4% from 3.7%, led by a 12% fall in telephone services and lower price increases for travel packages. 

With consumer prices above the Bank's 2% target for almost three years now, wage and price expectations remain important and the evidence there is mixed. While gasoline prices fell 4%, some households still face mortgage interest costs rising at a near record pace of 27% and rents up 7.9%. Grocery costs slowed to 3.4% from 4.7%, but households are also noticing that firms have simply shifted to "shrink-flation" where companies avoid raising prices by reducing package sizes. 

Some of the lower energy prices are linked to tax cuts rather than corporate pricing actions. Saskatchewan stopped collecting a carbon tax that pulled down natural gas prices by 27% and Manitoba gasoline prices fell 14% as the province suspended its tax on that item, StatsCan said. Lower gasoline prices also come from a base effect versus a year ago when prices were boosted as winter storms shut U.S. refineries. 

This the last inflation report before the Bank's March 6 rate decision, and investors expect the key lending rate to remain the highest since 2001 at 5%. Governor Tiff Macklem has said while debate is shifting towards when to cut, active discussions aren't useful until it's clear prices will stabilize at target. Officials have also said upside risks remain important after a long period of elevated price gains. Experts have warned early rate cuts could trigger another unwelcome housing frenzy in one of the world's most stretched markets. The Bank's forecast is for 2% inflation to return sometime in 2025, and economists see a rate cut around the middle of this year.