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Canadian Inflation Decelerates Sharply in January

Canadian headline inflation decelerated significantly faster than expected in January, and the underlying price indicators followed most closely by the Bank of Canada softened substantially – helping raise odds on an imminent pivot toward easier monetary policy. Data released by Statistics Canada this morning showed the Consumer Price Index rising 2.9 percent on a year-over-year basis in January, down from the 3.4 percent increase recorded in December, and far beneath consensus expectations set closer to 3.3 percent. On a month-over-month basis, prices held effectively unchanged – also well below market forecasts for a 0.4 percent gain.

Shelter costs provided the biggest lift, contributing 1.76 percent to the headline print as rising rent and mortgage rates drove living costs higher. With shelter costs excluded, prices rose just 1.5 percent year over year. 

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 3.35 percent over the same period last year, down from a revised 3.6 percent average in the prior month. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy. 

The swap-implied trajectory for Bank of Canada rate cuts is pulling forward, generating losses in the Canadian dollar as traders anticipate a faster and more aggressive easing cycle. The persistent gap between US and Canada rate expectations is narrowing, but this dynamic could fade somewhat as traders anticipate a modest firming in price pressures in the months ahead – other indicators are pointing to a slight rebound in domestic demand as easier financial conditions spur borrowing and home buying activity. Policymakers still look likely to keep their powder dry until after the March rate-setting meeting, with more data needed to confirm underlying trends. 

Canada’s interest rate-sensitive economy remains mired in near-recessionary conditions – and will likely continue to underperform the US on a broad range of measures – but a dead-cat bounce in growth, prices, and the Canadian dollar cannot be ruled out. 

Bank of Canada preferred inflation measures, annual % change

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