Canada inflation drops to slowest pace in almost a year

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Canada’s main measure of inflation dropped to its slowest in almost a year, complicating the Bank of Canada’s decision on what to do with interest rates.

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Statistics Canada reported Jan. 17 that the consumer price index increased 6.3 per cent from December 2021, down from 6.8 per cent the previous month and the smallest year-over-year increase since the index rose 5.7 per cent in February 2022.

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The drop in the headline number was mostly the result of lower gasoline prices, though Statistics Canada noted that its measure of the cost of replacing a home, fuel oil and various durable goods also decreased from year-ago levels. The index declined 0.6 per cent from November, pulled lower by a 13.1 per cent drop in pump prices; both were the largest largest month-to-month declines since April 2020, Statistics Canada said.

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Excluding food and energy, inflation rose 5.3 per cent from December 2021, down only marginally from 5.4 per cent in November. That suggests underlying inflationary pressures remain strong, and could prompt the Bank of Canada to keep raising interest rates.

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The numbers are the last significant figures the Bank of Canada will see before it decides whether to end — or at least pause — the most aggressive series of interest rate increases in its history. The Bank of Canada opened the door to a pivot in December, when it raised the benchmark rate another half point, but also said explicitly that its next move would depend on the data it received ahead of the next scheduled policy update on Jan. 25.

It was a significant shift because for most of 2022, the central bank’s leaders began each policy deliberation knowing they would be raising interest rates, making the debate about one question: how high? They would ratchet the benchmark rate all the way to 4.25 per cent, from 0.25 per cent in March. Most agree interest rates are nearing the limit of what the economy can bear, as the Bank of Canada’s own forecasts predict economic growth will stall over the months ahead.

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Yet inflation remains well off the central bank’s target of two per cent, and governor Tiff Macklem has vowed that he will settle for nothing less than a return to target. Statistics Canada’s previous inflation report — for November — didn’t send a clear signal. Earlier this month, the agency reported that the economy added more than 100,000 jobs in December, and that the jobless rate dropped to five per cent, suggesting the economy still had lots of momentum at the end of the year — and that interest rates would need to go higher still to crush inflation.

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