Canada inflation slows: What economists are saying

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Canada’s inflation rate for January decelerated to 2.9 per cent, dropping more than economists were predicting and possibly opening a window for the Bank of Canada to start cutting rates as early as June. Here’s what economists are saying about the numbers.

Olivia Cross, Capital Economics

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The Bank of Canada will be pleased with January’s inflation report, and not just because the headline rate slowed more than expected, said Olivia Cross, North America economist at Capital Economics.

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“The Bank of Canada will be pleased to see the more marked easing in its measures of core inflation,” Cross said, in a note following the release of data on Feb. 20 by Statistics Canada.

Month-over-month core inflation rose 0.1 per cent excluding food and energy, slower than the 0.3 per cent gain in December.

The Bank of Canada‘s preferred measures — CPI-trim and CPI-median — both slowed to 3.4 per cent and 3.3 per cent respectively, from 3.7 per cent and 3.5 per cent.

Still, Cross sounded a note of caution.

“January’s inflation print was a big positive shift in the right direction, but the Bank of Canada will need to see this trend continue before it will be comfortable pivoting to rate cuts,” she said. “After all, we saw headline inflation fall below three per cent in June, but this was followed by a series of sticker inflation prints.”

Capital expects the first rate cut to come at the central bank’s June 5 meeting.

Andrew Grantham, CIBC Economics

There was plenty of evidence in the latest inflation reading that elevated interest rates are starting to cut into discretionary consumer spending, said Andrew Grantham, an economist with Canadian Imperial Bank of Canada.

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“The unexpectedly large declines in airline fares and clothing prices may be a sign of weakness in consumer spending, but could also partly reflect some data volatility,” Grantham said in a note on the inflation report. Airline fares fell 14 per cent year over year. Clothing and footwear fell 1.8 per cent, seasonally adjusted, in the “sharpest monthly decline since April 2020 during the start of the pandemic,” he said.

Even if there were a partial rebound in inflation, it is still on track to come in at 2.9 per cent in the first quarter, the economist estimated.

That is “well below” the Bank of Canada’s forecast of 3.2 per cent inflation in its most recent Monetary Policy Report for the same period.

“So even with GDP growth running somewhat stronger than they expected, we still anticipate that interest rate cuts will start in June,” Grantham said.

Abby Xu, RBC Economics

The share of inflation accelerating at five per cent shrank to 28 per cent in January from a high of 68 per cent in May 2022, wrote Abby Xu, an economist as Royal Bank of Canada, as “the effect of past rate hikes feed into consumer prices persistently with a lag.”

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Still, the “breadth” of inflation is greater than would allow to hit the Bank of Canada’s target of two per cent, she said in a note on Feb. 20.

Xu expects shelter inflation to remain “sticky” as homeowners renew mortgages at higher interest rates and rents stay high due to Canada’s housing supply shortage.

The economist doesn’t believe the central bank should be in a rush to start cutting.

A stronger-than-expected jobs market gives the Bank of Canada room to wait and see if inflation is really on the way down, Xu said.

“As of now, our base case assumes the BoC starts to lower interest rates around mid-year,” she said.

• Email: gmvsuhanic@postmedia.com

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