Canada’s annual inflation rate slowed to 5.9% in January but food, mortgage costs continue to rise

Canada’s annual inflation rate eased more than expected to 5.9 per cent in January, data showed on Tuesday, backing up the Bank of Canada’s declared aim to keep rates on hold at its next meeting to let previous rate hikes sink in.

Analysts had expected inflation to edge down to 6.1 per cent from 6.3 per cent in December. Month over month, the consumer price index rose 0.5 per cent, Statistics Canada said, again lower than analysts’ forecast of a 0.7 per cent gain after a 0.6 per cent decline in December.

Statscan said part of the easing of the annual rate was due to the comparison with last year’s strong inflation numbers, or because of a base effect. In January last year prices gained amid Russia-Ukraine tensions and supply chain disruptions.

“There were some very strong base effects from last January that are starting to roll out of the headline inflation metrics,” said Andrew Kelvin, chief Canada strategist at TD Securities.

The inflation figure “allows (the Bank of Canada) to stay on hold in March, despite the fact that the labour market was extraordinarily hot in the month of January,” he said.

The Bank of Canada in January raised its benchmark interest rate to a 15-year high of 4.5 per cent and became the first major central bank to say it would hold off on further increases as long as prices eased in line with its forecast.

But Canada’s economy then smashed expectations by adding a net 150,000 jobs in January, data showed earlier this month.

Markets toned down their bets on another rate hike after the release of the inflation figures. Money markets now see a roughly 80 per cent chance that the Bank of Canada will raise interest rates again this year after having fully discounted such a move before the data.

The bank forecasts inflation to slow to about 3 per cent by the middle of 2023, and to come down to its 2 per cent target next year.

Excluding food and energy, prices rose 4.9 per cent compared with a rise of 5.3 per cent in December.

The average of two of the central bank’s core measures of underlying inflation, CPI-median and CPI-trim, came in at 5.1 per cent compared with 5.3 per cent in December.

“It gives them (the Bank of Canada) somewhat greater comfort in their decision to go on pause at least temporarily,” said Doug Porter, chief economist at BMO Capital Markets. “A lowside inflation read will definitely prove to be a nice antidote to some of those high-side surprises.”

Adding to the favourable base effect, cellular services fell 7.9 per cent annually in January after increasing 2.5 per cent in December, and consumers paid 6.2 per cent more for passenger vehicles compared with 7.2 per cent in December.

Mortgage interest costs, on the other hand, rose 21.2 per cent annually in January, the largest increase since 1982, while food prices rose 10.4 per cent, slightly faster than the 10.1 per cent in December.

The Canadian dollar was trading 0.4 per cent lower at 1.35 per U.S. dollar, or 74.07 U.S. cents.