Headline CPI inflation cooled a tick in January to 2.3% year-on-year (y/y) one tenth lower than consensus expectations. Even so, inflation was boosted by comparison to lower prices during the federal government’s temporary sales tax holiday from mid-December 2024 to mid-February 2025.
Prices at the pump were the biggest factor in cooler January inflation. Gasoline prices were down 16.7% on a year-on-year basis in January.
Not surprisingly, categories where inflation was highest were those impacted by the temporary GST/HST exemption, including restaurant meals (+12.3 y/y), alcohol purchased at stores (+7.9% y/y), games toys and hobbies (+8.7% y/y) and children’s clothes (+6.3% y/y).
Inflation at the grocery store eased slightly, but remained at 4.8% y/y. This was driven by lower prices for fresh fruit. Food inflation has been a particular sore spot recently (see report), but is expected to continue cooling in the months ahead.
Shelter inflation continued to cool (1.7% y/y). Slower price growth for rent (+4.3% y/y) and mortgage interest costs (+1.2%y/y) drove the deceleration.
The Bank of Canada has focused on broader “underlying inflation” recently, but the official core inflation metrics (median and trim), both cooled further in January, running at 2.5% y/y on average. Zeroing in on trends over the past three months, trim and median inflation were running well below the Bank of Canada’s 2% target.
Key Implications
Even with the base year effect from last year’s GST holiday, inflation was looking softer than expected in January. Underlying inflation remains above the 2% target on a year-on-year basis, but trends in recent months are looking decidedly soft. Canadian government bond yields are off slightly on the soft report.
Overall, January’s data is consistent with our expectation for inflation to moderate to the Bank’s target over the next year (see recent forecast), as past inflation problem areas, like rents, continue to cool.
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