Quick take

Discussed always and everywhere nowadays, inflation climbs in January

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  • In January, the Consumer Price Index (CPI) rose by 5.1 per cent (y/y), the largest year-over-year increase since September 1991.
  • Gasoline prices rose 4.8 per cent (m/m). Meanwhile, year-over-year food prices were up 5.7 per cent.
  • Excluding food and energy, the CPI climbed by 3.5 per cent (y/y) in January. Year-over-year prices were higher in all eight major CPI components. The transportation (+8.3 per cent) and shelter (+6.2 per cent) components contributed most to the increase in the CPI.
  • On a seasonally adjusted monthly basis, the CPI went up 0.6 per cent in January (0.3 per cent in December).
  • The average of the Bank of Canada’s three core inflation measures bumped up to 3.2 per cent in January from 3.0 per cent in December. CPI-trim increased to 4.0 per cent, CPI-median grew to 3.3 per cent, and CPI-common moved up to 2.3 per cent.

Key insights:

  1. The pandemic isn’t done with us yet, nor is high inflation. Reimposed restrictions following the spread of Omicron have kept demand concentrated on select components of the CPI. Stuck at home, consumers continue to spend on goods rather than services. As capacity limits ease and high-contact businesses reopen, demand for services will pick up again. This will help rebalance the demand for goods and services and slow inflation.
  2. Pandemic-induced disruptions to growth also factor into the interest rate calculus of the Bank of Canada. With the Bank’s forward guidance already over, we are calling for an interest rate increase next month. As rates rise and supply chain disruptions ease, we expect that price growth will start to cool this year. However, there are plenty of wild cards in the mix. For example, oil prices – which have a cascading effect on prices in other sectors of the economy – are on the rise.
  3. This year’s most significant risk for inflation is whether inflation expectations become unanchored. If consumers and businesses believe that the Bank won’t be able to put a lid on rising prices, then (even) higher prices could become a self-fulfilling prophecy. Our latest Index of Business Confidence survey found that half of the respondents believe inflation will rise at an annual rate of 5 per cent or more over the next six months. Most also have little faith that economic conditions will improve during this time. This pessimism could become self-fulfilling and impact expectations further down the road. Although not part of our baseline forecast, our forthcoming research confirms that persistently high inflation would drag GDP growth for several years.

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Kiefer Van Mulligen

Kiefer Van Mulligen


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