Canada’s inflation rate tumbles to 2.9 per cent, back inside BoC’s target range

Open this photo in gallery:

Canada’s inflation rate fell far enough in January to place it within the Bank of Canada’s target range, surprising analysts and reigniting speculation about a potential interest-rate cut this spring.

The Consumer Price Index rose 2.9 per cent in January on an annual basis, down from 3.4 per cent in December, Statistics Canada said Tuesday in a report. Financial analysts were expecting a slight easing to 3.3 per cent.

With that result, the headline inflation rate has fallen back within the Bank of Canada’s target range of 1 per cent to 3 per cent, for only the second time since consumer prices began to flare up in 2021. (The central bank aims for 2 per cent, the midpoint of that range.) Inflation is also tracking lower than the bank’s estimate for this quarter.

After the inflation report, investors ramped up their bets that the Bank of Canada will start to lower interest rates in the first half of the year. Interest-rate swaps, which capture market expectations about monetary policy, suggest there is roughly a 50-50 chance the central bank will deliver a quarter-point cut in April. The odds are more heavily stacked in favour of that move occurring at the following rate decision, in June. The bank’s next decision is on March 6.

Opinion: We no longer believe inflation will come down anymore, and that’s dangerous

Any cut would be the first since the central bank began hiking its key interest rate nearly two years ago, as part of its strategy to cool the economy and slow price growth. The bank has paused its hikes in recent months as it waits to see whether inflation has moderated enough to allow it to bring interest rates back down.

“As we’ve said before, underlying inflation has been making more progress than the Bank of Canada has been willing to concede,” Tiago Figueiredo, a macro strategy associate at Desjardins Securities, said in a note to clients. “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.”

The January inflation numbers were marked by a widespread easing of price pressures.

Seasonally adjusted consumer prices fell 0.1 per cent in January from December – the first monthly decline since the spring of 2020. Various core measures of inflation – which strip out volatile price movements – are slowing, too. For example, the Consumer Price Index excluding food and energy rose at a three-month annualized rate of 2.4 per cent, the weakest pace since April, 2021.

Grocery prices, a major source of concern for consumers and policy makers alike, rose at an annual pace of 3.4 per cent in January, down from 4.7 per cent in December. Statscan noted that the slowdown was broad-based. Prices for meat rose 2.8 per cent, dairy products by 1.5 per cent and fresh fruit by 1.9 per cent. In some cases – as with soup and bacon – prices fell over the past year.

Gas prices fell 4 per cent from a year ago, while on a monthly basis they dropped 0.9 per cent. Manitoba made a notable contribution to the national decline, Statscan said, owing to a temporary suspension of its provincial gas tax.

Consumers paid 24 per cent less for airfare in January compared with December. Slumps such as this are typical after the holiday period.

Meanwhile, inflation continues to be a pressing concern in the housing market. Shelter prices rose 6.2 per cent from a year earlier, picking up from December’s 6-per-cent pace. Rents accelerated to a 7.9-per-cent increase, from 7.7 per cent. Bank of Canada Governor Tiff Macklem recently stressed that monetary policy cannot solve the country’s housing affordability issues.

James Orlando, a senior economist at Toronto-Dominion Bank, argued in a Tuesday report that the central bank shouldn’t allow high shelter inflation to affect its interest-rate policies.

“While we have been arguing for the Bank to begin looking through the shortcomings created by shelter inflation and instead focus on the health of the broad economy, it is clear from recent central bank communication that it isn’t ready to do so,” he wrote. “And the longer the BoC continues to look at inflation through its current lens, the longer Canadians will have to bear the weight of a heavily restrictive policy rate.”

Prime Minister Justin Trudeau’s government has suffered in opinion polls as voters have felt the pinch of rising prices and higher borrowing costs. At a press conference in Vancouver, Mr. Trudeau called the decrease in the headline inflation rate “good news.”

“We are optimistic that the Bank of Canada will start bringing down interest rates some time this year, hopefully sooner rather than later,” he said.

The Bank of Canada’s preferred measures of core inflation rose at an average annual rate of 3.4 per cent in January, down from 3.6 per cent in December – a sign that underlying price pressures are subsiding, but remain in elevated territory.

“Overall, it appears that the sluggishness in consumer demand is finally impacting pricing in areas of more discretionary spending,” Andrew Grantham, a senior economist at CIBC Capital Markets, said in a client note. “That is a positive sign for the Bank of Canada, and will have financial markets pulling forward expectations for a first interest rate cut.”

At the Bank of Canada’s most recent interest-rate decision, in January, bank officials said they were shifting toward discussing how long to keep the bank’s key interest rate at its current level of 5 per cent. They also dialled back the threat of further rate hikes.

Also last month, the central bank projected average annual inflation of 3.2 per cent in the first quarter of 2024, although that could prove too high given Tuesday’s result. The bank expects a return to 2-per-cent inflation in 2025.

“January’s inflation print was a big positive shift in the right direction, but the Bank of Canada will need to see this trend continue before it will be comfortable pivoting to rate cuts,” Olivia Cross, North America economist at Capital Economics, said in a client note. “After all, we saw headline inflation fall below 3 per cent in June, but this was followed by a series of stickier inflation prints.”

With a report from Ian Bailey