In January, Canada witnessed a noteworthy deceleration in its annual inflation rate, which dropped more than anticipated to 2.9%. This decline was chiefly attributed to lower gasoline prices, contributing to the consumer price index’s lowest levels in over two years. Remarkably, this marked the first instance since June of the previous year that the rise in the consumer price index fell below 3%.
Analysts, who had predicted a modest decrease to 3.3% from December’s 3.4%, were surprised by the stagnation in the month-over-month consumer price index, contrasting with the projected 0.4% increase.
The Bank of Canada (BoC) observed a similar downward trend in two of its three core measures of underlying inflation. The CPI-median and CPI-trim both witnessed decreases, hitting 3.3% and 3.4% respectively, their lowest since November 2021 and July 2021.
While the BoC maintains that individual data points do not dictate policy decisions, the notable cooling of prices may hasten discussions regarding a potential rate cut. Despite projecting headline inflation to hover around 3% in the initial half of 2024 before easing to 2.5% by year-end, the central bank’s attention is shifting towards the timing of rate cuts rather than contemplating further hikes.
The Canadian dollar displayed a slight weakening against the U.S. dollar amidst these developments.
Shelter price inflation, encompassing mortgage interest costs, rent, and housing-related components, accelerated in January, contributing to overall inflation. Conversely, lower gasoline prices and a moderation in store-bought food prices exerted downward pressure on headline inflation.
Looking ahead, the BoC’s upcoming rate announcement in March is anticipated to maintain the key policy rate at its current 22-year high of 5%. Although there were speculations of rate cuts, a stronger-than-expected job gain in January and preliminary estimates of GDP growth rebounding in the final quarter of 2023 have tempered such expectations. However, money markets still project the first rate cut to occur in July, with at least a 50 basis points decrease expected in 2024, down from 125 basis points speculated earlier in January.
