Canada’s inflation eases well below expectations in January

Canada’s inflation rate slowed more than expected to 2.9% in January, down from 3.4% in December, beating expectations for a more minimal drop to 3.3% and marking the dip below 3% for the first time since June 2023.

The monthly consumer price index was flat in January, marking the first time since June of the previous year that the index rise dipped below 3%. In December, there was a 0.3% dip, and the forecast for January was a 0.4% rise.

Lower gasoline prices played a significant role in the headline deceleration, falling 4% on an annual basis and continuing a downward trend for the fifth consecutive month.

Prices of store-bought food rose 3.4%, the slowest pace since August 2021, also contributing to downward pressure on headline inflation.

Core inflation, which excludes volatile food and energy prices, rose 3.1% in January, compared to a 3.4% rise in December. Two of the BoC’s three core measures of underlying inflation also edged down.

The Bank of Canada had projected headline inflation to remain around 3% in the first half of 2024 before cooling down to 2.5% by the end of the year.

While the central bank has emphasized that single data points are not enough to influence policy decisions, the cooling of prices could expedite discussions about a potential rate cut. In January, the BoC kept its key overnight rate at 5% but indicated a shift in focus towards when to cut borrowing costs rather than whether to hike rates again.

Before the January announcement, members of the BoC’s policy-setting governing council were concerned about cutting borrowing costs too soon, particularly as shelter prices continued to keep overall inflation elevated.