Canada Inflation Cools to 2.9% in January -- Update

By Robb M. Stewart

OTTAWA--Canadian inflation decelerated more sharply than anticipated in January, offering comfort the central bank's past rate increases continue to work through the economy.

Consumer prices rose 2.9% in January from a year earlier, following December's gain of 3.4%, Statistics Canada reported Tuesday. That marked the lowest level since June, and undershot the 3.3% advance economists were expecting.

On a month-over-month basis, the consumer-price index was unchanged in January, after falling 0.3% the month before and compared with the 0.4% increase that was expected.

It is the last inflation reading before the central bank's March 6 policy meeting, when economists widely expect policymakers to hold steady for a fifth straight decision since last boosting the policy interest rate to a more than two-decade high in September.

The deceleration left annual inflation just inside the Bank of Canada's 1% to 3% target range and was driven by a drop in gasoline prices compared with last year. Excluding gasoline, headline inflation slowed to 3.2% from December's 3.5%.

Bank of Canada Gov. Tiff Macklem has cautioned that while consumers have pulled back spending and business investment has contracted in response to higher interest rates, the path to returning annual inflation to the 2% target mid-point is likely to be slow and uneven.

Annual inflation has cooled sharply since the bank began raising the policy rate in early 2022, easing to 3.9% last year on an annual average basis from a 40-year high increase of 6.8% the year before. The bank projects inflation will remain close to 3% during the first half of this year before gradually easing back to 2% in 2025, but remains concerned about persistence in underlying inflation.

The Bank of Canada's preferred measures of underlying annual inflation made progress in January, with weighted median and trimmed mean CPI rising an average 3.35% last month from a year earlier compared with 3.6% growth in December. The bank is watching the indicators for signs inflation is on a sustainable path toward its target before opening the door to rate cuts.

Ahead of the data, most economists weren't expecting the Bank of Canada to begin lowering rates before the summer and have suggested indications the economy began 2024 with a modest tailwind offer breathing space to avoid a decision that could reignite inflation, particular with the housing market showing tentative signs of coming back to life the past couple months.

Gasoline prices fell 4% in January after increasing the month before, largely thanks to the base effect of year-earlier comparisons to when prices at the pump rose with refinery closures in the U.S. southeast following Winter Storm Elliott. On a monthly basis, gas prices were down for a fifth consecutive month, falling 0.9%.

Consumers also paid less for airfares last month, with prices falling 23.7% from December and 14.3% on a year earlier in a month that typically sees a decline as heightened demand over the holiday season fades.

Grocery prices, which have remained elevated for more than a year, saw a slower increase in January, with a broad-based deceleration in prices for goods including meat, dairy productions, baked items and fresh fruit.

Mortgage interest costs and rent continued to be among the top contributors to inflation for the month, and prices increased sharply for cellular services following a steep decline in December.

Excluding food and energy costs, the core consumer-price index slipped 0.1% from the previous month and rose 2.7% year-over-year.

Write to Robb M. Stewart at [e-mail]

(END) Dow Jones Newswires

02-20-24 0859ET