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

Canadian Economics

  • In January, the Consumer Price Index (CPI) rose by 5.9 per cent (y/y). This was lower than December’s 6.3 per cent (y/y) increase.
  • Gasoline prices rose 4.7 per cent (m/m) and were 2.9 per cent higher than a year ago. Year-over-year, food prices increased in stores (+11.4 per cent) and restaurants (+8.2 per cent).
  • Core CPI (excluding food and energy) was up by 4.9 per cent in January (y/y), lower than the 5.3 per cent increase (y/y) in December. Higher prices in several shelter and food subcategories were key contributors to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI rose by 0.3 per cent in January.
  • The average of the Bank of Canada’s three core inflation measures fell to 5.6 per cent in January. CPI-median dropped to 5.0 per cent, CPI-common remained at 6.6 per cent, and CPI-trim fell to 5.1 per cent.

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.