Canada’s inflation rate fell to 2.9% in January. Here’s what happens next

11 a.m.

What’s next?

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The Bank of Canada will make its next interest-rate decision on March 6. Analysts aren’t expecting the bank’s policy rate – now at 5 per cent – to change. Instead, they’ll be looking for any indications about the timing of the next move.

The central bank has said it’s pivoting to a discussion of how long to keep rates at current levels.

Following Tuesday’s CPI report, traders ramped up their bets that the BoC will deliver its first rate cut in June.

On Feb. 29, Statscan will publish figures for gross domestic product, which could offer clarity of whether the country is slipping into a recession. The economy shrank in the third quarter, although recent figures suggest the contraction may have been short-lived.

– Matt Lundy

10:55 a.m.

Statscan says cellphone bills are plunging. The truth is more complicated

As households struggle with the largest bout of inflation in four decades, Statistics Canada says consumers are getting some relief from what is often a source of frustration: cellphone bills.

In 2023, cellular-service prices plunged by 27 per cent, according to Statscan’s consumer price index. This trend has been playing out for a while, with wireless prices down 50 per cent over five years.

The federal government has pointed to these figures as proof that its efforts to lower wireless prices – a pledge in the 2019 election campaign – are working. So too does the telecom industry, which is regularly criticized by consumer advocacy groups over a lack of competition and high costs.

But the truth of what’s happening to cellphone bills is more complex – and the Statscan numbers likely overstate the extent to which people are paying less.

Read the full story on the cost of cellphone bills.

– Matt Lundy and Alexandra Posadzki

10:45 a.m.

What today’s inflation numbers mean for mortgage holders and homebuyers

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Today’s lower-than-expected inflation reading from Statistics Canada is welcome news for both variable-rate mortgage holders and anyone thinking about signing up for a new fixed-rate mortgage.

Consumer prices were up just 2.9 per cent in January compared with the same month last year, a much smaller increase than the 3.3-per-cent rise widely expected by financial analysts.

That inflation hit the brakes bodes well for the Bank of Canada to begin cutting its trend-setting interest rate sometime around the middle of the year. Economists at several of Canada’s largest financial institutions reiterated their expectations that the central bank will announce the first of several rate cuts at its June meeting.

If that happens, variable-rate holders have only a few more months to go before they’ll see their mortgage interest costs decline. Borrowers with adjustable payments will see their mortgage installments shrink as their rate decreases in tandem with the Bank of Canada’s key rate. Those with fixed payments will see more of their money going to reduce their mortgage balance rather than paying off the interest on their loans.

Canadians who are shopping around for fixed-rate mortgages will likely benefit from this inflation slowdown even sooner. That’s because of the impact of the news on the bond market.

Bond traders, who seem just as surprised as economists by the data release, were pushing down the yield on five-year bonds, the benchmark for fixed-rate mortgages, on Tuesday morning. The move could translate into lower fixed mortgage rates just in time for the spring housing market.

For existing homeowners approaching the end of their mortgage term who want the security of a fixed rate, this could mean being able to sign up for a new loan with a lower-than-expected interest rate. Many in this group will likely still see a larger payment at renewal, but that increase will be smaller than previously anticipated.

For homebuyers who want a fixed rate, a further decline in fixed-rate mortgages makes it a bit easier to qualify for a loan or be able to buy a larger property. The flip side, of course, is that lower borrowing costs are also likely to attract more buyers into a housing market that is still starved for supply. That, in turn, could put upward pressure on prices.

– Erica Alini

10:15 a.m.

Inflation reading good news for BoC, but don’t expect a victory lap just yet

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The Bank of Canada needs to see more than one positive month of inflation data to consider cutting interest rates, but Tuesday’s lower-than-expected inflation reading is certainly a step in the right direction.

At 2.9 per cent, annual consumer price index inflation is back within the bank’s 1-per-cent to 3-per-cent control range. It may not stay there; CPI inflation fell to 2.8 per cent last June before rising again. But getting back into the target range is a symbolic marker on the road back to 2 per cent inflation.

Don’t expect Governor Tiff Macklem to declare victory at the bank’s upcoming interest rate decision on March 6. Even as inflation has trended lower, bank officials remain cautious. The minutes from the last interest rate decision in January showed the governing council was worried about cutting interest rates too early and having to reverse course if inflation rebounds.

However, things are changing at the central bank. Mr. Macklem and his team held the policy interest rate steady at 5 per cent in January for the fourth consecutive time. But they also confirmed that they no longer expect to raise interest rates further, and are mostly debating when to start lowering interest rates.

Financial markets responded to the January inflation data by pulling forward expectations for the timing of the first rate cut. Interest rate swaps, which capture market beliefs about monetary policy, now see a 50 per cent chance of a rate cut in April and a 70 per cent chance of a rate cut in June, according to Refinitiv data.

Bank officials have said repeatedly that they don’t need to see inflation get all the way back to 2 per cent before easing monetary policy. But they do need to be confident that it is firmly on a downward track. Here they are looking at core inflation measures, the pace of wage growth, consumer and business expectations about future inflation and corporate price-setting behaviour.

When it comes to the bank’s preferred measures of core inflation, which strip out the most volatile components of the CPI to capture underlying price pressures, the January data was reassuring. CPI-median fell to 3.3 per cent in January from 3.5 in December, while CPI-trim dropped to 3.5 per cent from 3.7 per cent.

A key question now is what data the bank will choose to prioritize in its assessment of inflation pressures. Much of the current inflation is being driven by the shelter component of the CPI, which is made up of rent, mortgage interest costs and other housing-related expenses.

Bank officials have said they can partly look past mortgage interest costs, because these are directly tied to the bank’s own interest rate decisions. And when it comes to rent inflation, Mr. Macklem has said several times in recent months that this is tied to structural imbalances in the housing market that cannot be addressed by raising or lowering interest rates. This has led some economists to argue that the bank should play down the shelter component of inflation when deciding when to cut interest rates.

The bank’s latest forecast from January shows inflation averaging around 3 per cent until the middle of 2024, before falling to around 2.5 per cent by year-end, and back to 2 per cent next year.

– Mark Rendell

9:55 a.m.

Economists react to Tuesday’s StatsCan inflation report

Douglas Porter - chief economist, Bank of Montreal

There is little debate on this one — it’s a much milder reading than expected, especially given the high-side surprise seen in last week’s round of U.S. inflation reports, a nice contrast. Importantly, January can set the tone for inflation, since firms often take the opportunity to adjust prices for the year in this month, and there was little sign of a big January bump this year. Just as an example, both furniture and appliance prices were up in the month, but both are down from a year ago, as goods inflation fades. 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. 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.

Leslie Preston - senior economist, Toronto Dominion Bank

Canadians got a bit better news on the inflation front in January, with headline inflation dipping a toe below 3 per cent, and the Bank of Canada’s preferred core measures also making progress. With various discretionary items showing signs of larger-than normal seasonal discounting, the weak consumer demand that has prevailed in Canada for some time may finally be starting to show up in prices. Shelter inflation remains a thorn in the BoC’s side. As discussed in a report out soon, shelter inflation has become the biggest hurdle preventing the bank from cutting interest rates. The BoC is likely to be pleased with the progress on inflation to start the year, but inflation remains too far above target to start cutting rates. We expect that price pressures will continue to come off the boil in the coming months, and that the bank will be ready to cut rates come the spring.

Andrew Grantham - senior economist, Canadian Imperial Bank of Commerce

Measures of core inflation generally eased as well, albeit not as much as the headline figure. CPI trim and median remained elevated at 3.4 per cent and 3.3 per cent respectively year-over-year, although these were a couple of ticks lower than consensus expectations. Over all, it appears that the sluggishness in consumer demand is finally impacting pricing in areas of more discretionary spending. 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.

Olivia Cross - North America economist, Capital Economics

While the larger-than-expected drop in headline inflation in January was partly driven by weaker than expected energy inflation, the Bank of Canada will be pleased to see the more marked easing in its measures of core inflation. Our base case is that the bank will cut rates at its June meeting, but the balance of risks is now more skewed to an earlier cut. 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. After all, we saw headline inflation fall below 3 per cent in June, but this was followed by a series of sticker inflation prints.

Tiago Figueiredo - economist, Desjardins

As we’ve said before, underlying inflation has been making more progress than the Bank of Canada has been willing to concede. 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. Shorter-term Government of Canada bond yields have fallen significantly following the release of this data.

Andrew DiCapua - senior economist, Canadian Chamber of Commerce

Inflation is now in the target range and in line with the bank’s forecast for January. That’s the good news. But the bank is also acutely aware of the stickiness of core measures and the impact shelter prices are having on headline inflation. That’s why they will likely keep their policy stable until price pressures abate enough to account for those large contributions that shelter prices are having – and will continue to have – moving forward. All this is making the return to target more difficult. But should the economy and labour market remain buoyant, timing is surely in the bank’s favour.

– Mark Rendell

9:40 a.m.

Markets react to the latest inflation data

Fixed-income markets were wrong-footed by the weakness in CPI Tuesday morning. The two-year bond yield had been drifting higher ahead of the release, from 4.24 per cent at 8:07 and 4.27 per cent just before 8:30. The yield fell 10 basis points immediately after the number, recovered slightly, then fell even further to 4.15 per cent.

The pattern was similar for the five-year bond, the benchmark that drives mortgage rates. The five-year yield eased a few basis points lower to 3.67 per cent in early trading, then plummeted 10 basis points on the CPI data before falling one more basis point to 3.56.

Unlike the last few big days of big data releases for the bond market, including Bank of Canada announcements on policy rates, the results were clearly not priced in ahead of time.

– Scott Barlow

9:35 a.m.

Analysis: January’s inflation report is a ‘major step toward a return to normal’

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Does anyone remember what normal inflation looks like?

For the first 20 years of this century, inflation was right around 2 per cent. The 2.9–per-cent rise in the cost of living in January on a year-over-year basis is a major step toward a return to normal.

Some important perspective: The inflation rate was at 2.8 per cent last June, then surged as high as 4 per cent before getting down to the low 3-per-cent range last fall. Inflation is incredibly tenacious – it backs off and then rallies.

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

But there are encouraging signs that the overall inflationary surge that began in 2021 is finally in retreat. Check out food prices, the biggest source of financial stress in the overall inflation number. Food prices were up 3.9 per cent in January, down from 5 per cent in December and 10.4 per cent in January, 2023.

The stickiest inflation right now seems to be shelter costs, which include rent and mortgage interest. Inflation in the shelter category was 6.2 per cent in January, up from 6 per cent in December. Rent remains a festering problem that will only be fixed if the supply of housing improves or there’s a recession that curbs demand for rental housing.

Some undeniably good inflation news is that prices for clothing and footwear fell 1.3 per cent in January. A sad fact of sustained inflation like we’ve seen in recent years is that it raises the floor on living costs. Prices only decline if there is deflation, which is a rare and generally disastrous economic phenomenon that can signify recession or worse.

However, it is possible to see prices pull back in competitive niches of the economy. Clothing is one example, and another is furniture, appliances and other household goods. Prices in this category edged down 0.5 per cent last month. Grocery shopping is a drag right now, but buying a couch or a dishwasher is a different story.

– Rob Carrick

9:20 a.m.

Inflation highlights: Prices for groceries, gas and rent

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Here are some highlights from Tuesday’s report:

• Food was a standout area, given the slowdown in price increases. Statscan noted that an easing in grocery inflation was broad-based in nature. Meat prices grew 2.8 per cent year over year, dairy products by 1.5 per cent and fresh fruit by 1.9 per cent. This trend was telegraphed by weaker price hikes at earlier stages of the food-supply chain.
• Gasoline prices fell 4 per cent over the previous year, which had a big effect on overall inflation figures. On a monthly basis, prices fell by 0.9 per cent.
• Shelter remains a challenging area. Those costs rose 6.2 per cent on a year-over-year basis, picking up from 6 per cent in December. Rents jumped by 7.9 per cent in January, up from 7.7 per cent in December.
• In one example, the CPI excluding food and energy rose at a three-month annualized pace of 2.4 per cent, the lowest since April of 2021.

– Matt Lundy

9:05 a.m.

A look at inflation, by province

8:45 a.m.

The new inflation numbers

Canada’s annual inflation rate fell to 2.9 per cent in January, not only much lower than Bay Street estimates, but marking a return to the Bank of Canada’s target range.

Financial analysts were expecting inflation to slow to 3.3 per cent from December’s 3.4-per-cent pace when Statistics Canada reported fresh numbers on Tuesday. Instead, the annual change in the Consumer Price Index surprised to the downside.

Adjusted for seasonality, consumer prices fell 0.1 per cent in January from December – the first monthly decline since the spring of 2020.

There was a significant deceleration at the grocery store, Statscan said. The price of food purchased from stores grew at an annual rate of 3.4 per cent in January, down from 4.7 per cent in December. At peak levels, grocery inflation was running around 11 per cent.

With Tuesday’s release, the inflation rate now falls within the Bank of Canada’s target range of 1 per cent to 3 per cent. (The BoC aims for the midpoint: 2 per cent.)

The central bank was expecting average annual inflation of 3.2 per cent in the first quarter. Barring an uptick, it appears that inflation could be subdued on a quicker timeline.

Investors and economists have tentatively predicted that the Bank of Canada will begin to lower its benchmark interest rate around the middle of the year.

– Matt Lundy

8:30 a.m.

Canada’s inflation rate fell to 2.9% in January: Statscan

Canada’s annual inflation rate fell to 2.9 per cent in January, not only much lower than Bay Street estimates, but marking a return to the Bank of Canada’s target range.

– Matt Lundy

8 a.m.

Minimize inflation in your grocery bill with our calculator

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Is your weekly grocery bill looking a lot higher lately? You can probably blame food inflation for the changes you’ve seen at the supermarket.

If you’re looking for more ways to shield your grocery cart from inflation, this calculator will help you spot ways to bring down costs.

– Globe staff

7:30 a.m.

Inflation’s last mile to Bank of Canada’s 2-per-cent target could be a long and winding road

After surging to a four-decade high in 2022, the annual pace of inflation in Canada is back within striking distance of the Bank of Canada’s target. The key question now is how long it will take to traverse the final leg down.

Some economists think this last mile, bringing consumer price index inflation from around 3.5 per cent to the central bank’s 2-per-cent goal, will be the hardest.

Most of the disinflation over the past 18 months has come from falling oil prices and improvements in global supply chains. That was the easy part, the argument goes. What’s left of inflation is being driven by domestic forces and concentrated in services, making it harder to tame without an extended period of slow economic growth and rising unemployment.

Other economists, by contrast, think inflation is closer to target than hawkish central bankers are willing to admit.

Economic growth in Canada has effectively stalled since last summer, dampening inflationary pressures. And, excluding high increases in shelter costs – which are partly a result of past interest rate hikes – inflation is already only a few ticks above the bank’s target.

There’s a lot riding on this debate. Bank of Canada officials are no longer actively discussing raising their policy interest rate, which they have held steady at 5 per cent since July, a two-decade high, in a bid to slow the economy and restrain price growth. But they say they won’t contemplate rate cuts until they’re confident inflation is firmly on a downward track from the current level.

Read our feature on the state of inflation today – as central bankers lace up for the last mile.

– Mark Rendell, Matt Lundy and Jason Kirby

7 a.m.

January inflation report to be released today

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When Statistics Canada releases its January inflation report today, consumers and analysts alike will be looking for signs that inflation is heading in the right direction: down.

Of late, that’s not been the trend. The annual change in the Consumer Price Index was 3.4 per cent in December, up from 3.1 per cent in November. For central bankers, the bigger concern is that core measures of inflation – which remove outlier movements in the CPI – have also heated up.

While the inflation rate has more than halved from a peak of 8.1 per cent in mid-2022, Bank of Canada officials have stressed that the “last mile” – bringing inflation back to its 2-per-cent target – could be tricky.

A prime culprit for rising prices is housing. Mortgage interest costs and rents are making some of the largest contributions to price growth, and the BoC expects this trend to continue, especially in light of a persistent housing shortage across the country.

Economists at the Bank of Montreal expect the inflation rate to hold steady at 3.4 per cent. Derek Holt, head of capital markets economics at Bank of Nova Scotia, is predicting an uptick to 3.5 per cent.

The BoC projects that inflation will linger around 3 per cent through the first half of the year, then ease to 2.5 per cent in the second half before hitting the 2-per-cent target in 2025.

Investors and economists have been pushing back their timeline for when the Bank of Canada – currently holding its policy rate at 5 per cent – and the U.S. Federal Reserve will start to lower interest rates, accounting for strong economic data in recent weeks.

Traders are now leaning toward the first Canadian rate cut arriving near the middle of the year, whereas many had been expecting a first move this spring.

– Matt Lundy