HomeContributorsFundamental AnalysisCanada: Inflation Sees Some Welcomed Cooling in January

Canada: Inflation Sees Some Welcomed Cooling in January

Headline CPI inflation cooled more than expected in January, stepping down half a point to 2.9% year-on-year (y/y).

Energy prices, and more specifically gasoline prices, were a key part of lower inflation, with gasoline prices down 4% versus a year ago. But even ex-gasoline headline CPI inflation slowed from 3.5% y/y in December to 3.2% y/y in January.

Grocery inflation also cooled in January, with prices up 3.4% y/y compared to 4.7% in December. Other good news for consumers came from airfares (-14.3% y/y) and travel tours.

However, consumer’s biggest ticket item, shelter, saw steeper price increases in January, up 6.2% y/y from 6.0% in December. Rent inflation ticked up to 7.8% y/y in January, up from 7.5% in December. Owned accommodation inflation remained steady at 6.7%. This kept overall services inflation elevated at 4.2% y/y.

In contrast, goods inflation showed signs of cooling. Core goods prices were up only 1.5% y/y in January, down from 2.2% in December. Clothing and footwear prices were down 1.3% y/y in January, helping to reduce core goods inflation.

The Bank of Canada’s preferred “core” inflation measures also cooled a bit in January with CPI trim up 3.4% y/y and CPI median up 3.3% y/y, versus 3.7% and 3.5% in December.

Key Implications

Canadians got a bit better news on the inflation front in January, with headline inflation dipping a toe below 3%, and the Bank of Canada’s (BoC) 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.

TD Bank Financial Group
TD Bank Financial Grouphttp://www.td.com/economics/
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

Featured Analysis

Learn Forex Trading