Canada Inflation Cools to 2.9% in January -- 2nd Update

By Robb M. Stewart

OTTAWA--Canadians saw some welcome relief to start the year as inflation decelerated more sharply than expected, reigniting expectations rate cuts are on the horizon.

Consumer prices were unchanged from the month before in January and rose 2.9% from a year earlier, Statistics Canada reported Tuesday. The slowdown from December's annual 3.4% advance undershot the 3.3% inflation economists were expecting and marked the lowest pace since June.

It is the last consumer-price index 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, though the last time that happened inflation picked up again the following month. Key measures of core CPI closely watched by the central bank also eased for the month, though they still signal inflation remains outside the target band.

January's deceleration was driven as expected by a drop in prices at the pump compared with a year earlier, when gasoline costs jumped after refinery closures in the U.S. southeast following Winter Storm Elliott. Prices also fell for airfares and clothing, while shelter costs remained elevated.

While economists on balance don't expect the Bank of Canada to pivot to lowering interest rates until the summer, they now see an elevated risk a first cut could now come sooner.

The inflation picture in Canada contrasts with the U.S., where consumer inflation eased again in January to 3.1% from a year earlier, also the lowest reading since June, but was stronger than the 2.9% predicted.

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.

"While no doubt welcome news, the Bank of Canada will likely remain cautious in the face of still-strong wage gains, firm services prices and the reality that core inflation is still holding above 3%," said Douglas Porter, chief economist at Bank of Montreal. "Today's result makes rate cuts much more plausible in coming months, and we remain comfortable with our call that the bank will begin trimming in June."

The market reaction signaled investors are bringing forward expectations for a cut, with yields on short-term debt falling after the release of the CPI data and the Canadian dollar strengthening slightly.

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 of Canada 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.

"January's inflation print was a big positive shift in the right direction, but the Bank of Canada will need to see this trend continue before it will be comfortable pivoting to rate cuts. After all, we saw headline inflation fall below 3% in June, but this was followed by a series of sticker inflation prints," Olivia Cross, North America economist at research firm Capital Economics, said.

For January, gasoline prices fell 4% after increasing the month before. On a monthly basis, gas prices were down for a fifth consecutive month, falling 0.9%.

Consumers paid less for airfares, with prices falling 23.7% from December and 14.3% from a year earlier in a month that typically sees a decline as heightened demand over the holiday season fades. There also were declines in costs for other inter-city transportation and a sharper fall in clothing prices than the month before, which economists said isn't typical for the time of year. That meant the core consumer-price index excluding food and energy slipped 0.1% from the previous month and rose 2.7% year-over-year.

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

Still, 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 after increases by major telecommunications companies.

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

(END) Dow Jones Newswires

02-20-24 1111ET