Inflation Decelerates for a Third Consecutive Month, But Food Prices Remain a Concern

Key Insights

Tightening monetary policy is working, but the path back to 2 per cent will be slow. CPI growth decelerated once again – however, there are growing concerns over food and shelter costs. Higher rents and increased mortgage interest costs kept shelter costs elevated in January. In addition, a mixture of domestic and global factors has caused the price of food production to rise, resulting in Canadians facing higher food prices at grocery stores. The Bank of Canada’s monetary policies have had little impact on food inflation because of the external upward pressures on food production costs. Food costs will eventually subside, but it will take several months. Given that higher prices in several food subcategories were key contributors to CPI growth, we expect inflation to fall within the target range by the end of 2023.

The Bank of Canada should not rest on its laurels. This month’s CPI release indicates that inflation is headed in the right direction. However, it remains too high for comfort. Despite the recent rate hikes, employment levels surged in January – around 150,000 jobs were added – implying that the Canadian economy remains overheated. The Bank will continue to assess the rate at which inflation is decelerating before deciding to hit a pause on interest rates. With CPI increasing 0.3 per cent (m/m) this month, the Bank should possibly look to raise rates again in March, otherwise inflation may become stickier. Inflation trends in the U.S could also help us gauge Canada’s inflation path. U.S inflation inched lower in January (6.4 per cent), and despite the Federal Reserve’s recent rate hikes, the rate at which inflation is decelerating seems to be slowing down. There are already signs that this is occurring in Canada, so the Bank should be wary of this.