By Canadian inflation took a sharp deceleration in January, offering reassurance that the central bank’s previous rate hikes are having an impact on the economy.
Key Points:
- Consumer prices rose 2.9% annually in January, down from December’s 3.4% increase.
- The month-over-month consumer-price index remained unchanged in January.
- Economists had expected a higher advance in inflation, with a forecast of 3.3%.
This latest data comes just before the Bank of Canada’s upcoming policy meeting on March 6, where policymakers are anticipated to maintain a steady course following the rate increase in September.
Understanding the Numbers:
- The dip in inflation comes as gasoline prices decreased compared to the previous year.
- Excluding gasoline, headline inflation slowed to 3.2% from December’s 3.5%.
Bank of Canada Governor Tiff Macklem has highlighted that the journey to reach the 2% inflation target will be gradual due to reduced consumer spending and business investment in response to higher interest rates.
Looking Ahead:
- Annual inflation has lowered significantly since early rate increases in 2022.
- Inflation is projected to hover around 3% in the first half of this year before returning to 2% by 2025.
- Concerns remain about the persistence of underlying inflation despite these positive trends.
Bank of Canada Inflation Trends
The Bank of Canada is closely monitoring the progress of its preferred measures of underlying annual inflation. In January, both the weighted median and trimmed mean CPI showed an average increase of 3.35% from a year earlier, compared to 3.6% growth in December.
Rate Cut Considerations
The central bank is cautious about opening the door to rate cuts, waiting for clear signs that inflation is on a sustainable path towards its target. Most economists anticipate that any rate adjustments will not occur before summer, considering the current economic climate.
Price Movements
Gasoline Prices
Gasoline prices experienced a 4% decline in January after a previous increase, attributed largely to the base effect of year-over-year comparisons. This decline marks the fifth consecutive month of decreasing gas prices.
Airfares and Grocery Costs
Airfares saw a significant drop of 23.7% from December, following the trend of declining demand post-holiday season. Meanwhile, grocery prices, which have been elevated for over a year, experienced a slower increase in January across various categories.
Other Contributors to Inflation
Mortgage interest costs and rent remain key drivers of inflation, while cellular services saw a notable price increase after a decline in the previous month. Excluding food and energy costs, the core consumer-price index saw a slight decrease of 0.1% from the previous month but rose by 2.7% year-over-year.
In summary, the latest inflation data presents a nuanced picture of price movements across different sectors, with the Bank of Canada keeping a watchful eye on these trends.
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