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Canadian Inflation, Retail Numbers Ease Policy Concerns

Headline Canadian inflation slowed last month, and underlying price indicators eased, alleviating pressure on the Bank of Canada to follow its southern counterpart in signalling a more aggressive pace of rate increases. Data released by Statistics Canada this morning showed the Consumer Price Index rising 5.9 percent on a year-over-year basis in January, below consensus expectations for a 6.1 percent increase, even as the month-over-month change hit 0.5 percent – exceeding a forecasted -0.1 percent decline.

Gasoline prices rose 4.7 percent month-over-month.

Shelter costs decelerated, up 6.6 percent year-over-year, down from December’s 7-percent pace as rate hikes impacted the housing market. Mortgage interest costs surged 21.2 percent from the prior year, the largest increase since September 1982, but the homeowners’ replacement cost index—a proxy for home prices—continued to lose momentum, up just 4.3 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 5.05 percent over the same period last year, down from 5.25 percent 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.

Separately, retail sales increased as expected in December, but an advance estimate showed overall receipts jumping 0.7 percent in January, suggesting that underlying economic momentum remains strong. Data released by Statistics Canada this morning showed sales rising 0.5 percent on a month-over-month basis in December, matching initial estimates and consensus forecasts. Sales at auto and parts dealers rose 3.8 percent, while gas station receipts fell 5.8 percent. In volume terms, sales were up 1.5 percent, and the core nominal measure rose 0.4 percent.

The Bank of Canada has clearly telegraphed an imminent pause in its tightening cycle and today’s data should support expectations for a lack of action at the next meeting – but core price pressures remain well above the institution’s target range, making another quarter-point interest rate hike reasonably possible in the coming months. Of course, this remains unlikely to narrow the gap with the Federal Reserve – facing stronger inflation pressures and a less-leveraged household sector, the US central bank is expected to continue raising rates for longer, and cut them later – meaning that the Canadian dollar won’t receive much support from interest differentials in the near term.

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