Canadian gasoline pieces were up 8.6 per cent in January year-over-year after a 3.5-per-cent increase in December.Mark Blinch/Reuters
Canada’s annual inflation rate ticked upward last month but remained below the Bank of Canada’s target, as higher energy prices offset the lingering effects of the federal tax holiday on the price of food and other goods.
The Consumer Price Index rose 1.9 per cent in January year-over-year, up from 1.8 per cent in December, Statistics Canada reported Tuesday. It was the first acceleration in inflation in three months and matched analysts’ expectations.
Financial markets trimmed their bets on another interest-rate cut from the Bank of Canada after the inflation reading. Interest-rate swap markets now put the odds of another quarter-point cut at the central bank’s next meeting on March 12 at around 30 per cent, according to LSEG data, down from around 40 per cent before the Statscan report.
The central bank’s two preferred core inflation measures, which strip out volatile price movements, rose to an average of 2.7 per cent, up from 2.55 per cent in December. That suggests price pressures are building underneath the headline CPI number, which has been weighed down by the two-month GST/HST break that started in mid-December and ended Feb. 15.
The Bank of Canada has cut interest rates six consecutive times, bringing its policy rate down to 3 per cent in January. But there is considerable uncertainty about the path forward for monetary policy.
With inflation below the central bank’s 2-per-cent target and the policy rate near the bank’s estimate of “neutral,” officials have said that further rate cuts are not a sure thing. At the same time, if a full-blown trade war breaks out with the United States, the central bank may have to cut aggressively to support the Canadian economy through a recession.
“The GST holiday meant that headline inflation remained below the 2 per cent target in January, but there is clear evidence that underlying inflation pressures are building,” wrote Stephen Brown, deputy chief North America economist at Capital Economics, in a note to clients. “That suggests the Bank of Canada is getting close to the end of its loosening cycle, although the outlook for monetary policy ultimately hinges on whether President [Donald] Trump soon imposes stiff tariffs on imports from Canada.”
Statscan calculates the Consumer Price Index by looking at the price of goods and services with taxes included. That means tax changes influence CPI inflation.
The two-month tax holiday, which the Liberals announced late last year in a bid to improve their political fortunes, continued to influence food price inflation. Food prices decreased 0.6 per cent year-over-year, the first annual decrease since May, 2017. That was driven by a 5.1-per-cent decline in restaurant prices, triple the previous record decline.
Canadians also paid 3.6 per cent less for alcoholic beverages and 6.8 per cent less for toys, games and hobby supplies year-over-year as a result of the tax break.
This was offset by a jump in gasoline pieces, which were up 8.6 per cent in January year-over-year after a 3.5-per-cent increase in December. In Manitoba, gasoline prices jumped 26 per cent as the provincial sales tax was reintroduced after a year-long suspension in 2024.
Natural gas prices rose 4.8 per cent on an annual basis after a 5.5-per-cent decline in December.
Housing remains the biggest driver of overall inflation, although increases in home ownership costs and rental costs are slowing down. Mortgage interest costs were up 10.2 per cent year-over-year in January, compared with 11.7 per cent in December, while rent was up 6.3 per cent year-over-year, compared with 7.1 per cent the month before.
“No big surprises in today’s report, which is generally a good thing on the inflation front, and we’ll call this one a draw on the interest rate outlook front,” Bank of Montreal chief economist Douglas Porter wrote in a note to clients.
“However, as the GST holiday lifts from the data in the next two months, the headline tally will likely quickly rise to roughly match current core trends of closer to 2.5 per cent. … We continue to lean to the view that the BoC will take a pause at their next decision (March 12), although developments on the tariff front may yet have a big say in that call – the possible 25 per cent U.S. tariff on Canada and Mexico still looms for March 4.”