According to Statistics Canada, higher energy costs drove Canada’s inflation rate to 1.9% in January despite the federal GST holiday. The slight uptick in headline and core inflation measures has reduced market expectations that the Bank of Canada will lower its policy rate next month.
Energy prices were up 5.3% compared to January last year, with gasoline and natural gas leading the increase. Gas prices rose 8.6% year-over-year, with Manitoba seeing the largest jump due to the reinstatement of the provincial gas tax, which had been suspended in 2024.
Natural gas prices climbed 4.8% annually and 6% monthly, with British Columbia reporting the sharpest rise.
Although inflation increased from December’s 1.8%, the GST/HST holiday introduced in mid-December helped ease some price pressures. Food prices dropped 0.6% overall, marking the first annual decline since May 2017.
This was largely due to a 5.1% decrease in restaurant food prices. Alcohol purchased in stores also fell 3.6% in January. The temporary tax break ended on February 15. Without the GST holiday, the consumer price index (CPI) would have risen 2.7% in January, down slightly from the 2.9% increase in January 2024.
Core inflation, which the Bank of Canada prioritizes for policy decisions, saw minor growth. CPI-common rose 2.2% year-over-year in January, up from 2% in December. CPI-median increased to 2.7% from 2.6%, while CPI-trim reached 2.7%, compared to 2.5% the previous month.
David Rosenberg, president of Rosenberg Research Inc., noted that it remains uncertain how much weight the Bank of Canada will place on these figures, given economic instability and the looming potential for tariffs that could hit the economy.
Shelter inflation held steady at 4.5% in January, while new vehicle prices rose 2.3%, a jump from December’s 0.9% increase.
Andrew Grantham, a senior economist at CIBC, observed that shelter costs, which had been a consistent driver of inflation, are levelling off. Rents even dropped slightly month-over-month for the first time since August 2022. Based on current market data, he suggested further rent declines could be on the horizon.
Grantham still expects the Bank of Canada to lower its overnight rate to 2.25% this year but acknowledged uncertainty about the timing of rate cuts due to tariff concerns.
The central bank’s policy rate remains at 3%. In January, it reduced the rate by 0.25 percentage points following back-to-back 0.50 point cuts in October and December. Markets now indicate a slightly over one-third chance of another 25-point cut next month.
Douglas Porter, chief economist at BMO, stated that January’s inflation data didn’t present any major surprises. He believes the Bank of Canada will likely maintain its current rate at the next policy meeting, though tariffs could influence this decision.
“With the GST holiday ending, headline inflation is expected to align more closely with core inflation trends of around 2% to 2.5% in the coming months,” Porter wrote in a note to clients.
Rosenberg also pointed out that the weaker Canadian dollar contributed to the inflation data. However, he suggested that inflation should continue trending downward as long as the economy operates with excess supply.
“While it may seem like the decline in underlying inflation has stalled, this appears to be just a temporary pause,” he said.
