- CPI inflation jumped to 2.1% year-over-year from 1.5% in December as energy price inflation surged to 12%.Today’s reading is well above the consensus forecast of 1.6% and marks the first time inflation has exceeded 2% since October 2014.
The all items index rose 0.9% on a monthly, unadjusted basis in January, marking the strongest increase in two years. A good portion of the gain reflected a 4.5% rise in the energy component as both gasoline and natural gas prices picked up strongly. Newly-introduced carbon pricing schemes in Ontario and Alberta were major factors, although higher commodity prices also played a role. Another policy change in Ontario /an HST rebate on electricity bills/provided some offset, driving electricity price inflation into negative territory for the first time in three years. Food prices rose for just the second time in six months, although the rate of food price deflation accelerated to -2.1% year-over-year as a currency-driven surge in fresh food prices in January 2016 fell out of the calculation. The current period of food price deflation is the most significant since 1992 and reflects lower prices for agricultural commodities, less exchange rate pass-through, and according to the Bank, more intense competition in the retail sector.
Some measures of core inflation were firmer in January, particularly the all items ex food and energy index which is now up 2.2% year-over-year. However, the Bank of Canada’s new core measures were little changed on balance, with the average of the three remaining steady at 1.6% (December’s average was revised down from 1.7% after rounding).
Between base effects in the food and energy components, newly-introduced carbon pricing and other policy changes at the provincial level, there is a lot to digest in today’s inflation report. Ultimately, while the headline reading came in well above market expectations and the Bank of Canada’s forecast, the main driver of the increase (energy prices) was not a surprise. Inflation is on track to exceed the Bank’s 1.8% projection for the first quarter, but their new core measures, which remain slightly below 2% on average, are consistent with their assessment that the economy is running below potential. On the labour market side, job growth has been very strong in recent months and measures of slack have generally returned to levels seen prior to the oil price shock, although weak wage growth seems to indicate the economy remains short of full employment. With underlying details of today’s inflation report largely fitting the Bank’s narrative, we expect next week’s policy statement (following what is universally expected to be a steady rate decision) will continue to reflect a neutral, if not slightly cautious tone.