Consumer price inflation accelerated to 5.1% year-on-year (y/y) in January, from 4.8% in December and well ahead of market expectations for an unchanged print. Energy price growth accelerated to 23.1% (from 21.2% in December), even as gasoline price growth slowed year-on-year (to 31.7% from 33.3% in December). Excluding energy, prices picked up noticeably, hitting 4.0% y/y (from 3.7 in December).
Seasonally adjusted, month-on-month prices were up a robust 0.6%. Price growth was broad and swift across categories in January. Every category saw monthly gains well in advance of their recent historic norms, with especially strong growth in recreation, reading and education (+2.2%), tobacco and alcohol (+1.1%), transportation (+0.7%), food (+0.6%), and shelter (+0.5%).
All three of the Bank of Canada’s core inflation metrics rose 0.2 percentage points in January. CPI-trim hit 4.0% (from 3.8%), CPI-median to 3.3% (from 3.1%), and CPI-common measure to 2.3% (from 2.1%).
Key Implications
It is no longer possible to point to idiosyncratic factors as driving prices higher in Canada. Inflation is broad based and elevated across categories. Headlines are likely to get worse before they get better, with year-on-year comparisons boosted by softer price growth in the spring of last year.
Higher interest rate hikes won’t immediately quell inflation, but they are essential to slowing it over the medium term. Inflation expectations still appear to be well moored and anticipation that the Bank of Canada will raise interest rates has lifted interest rates to their highest level since before the pandemic.
Still, it will be important to watch the evolution of supply constraints as well as geopolitical risks. Unless these ease, inflation will continue to surprise on the upside, making the job of achieving a smooth landing that much harder.
