Canada’s headline inflation rate rose by 1.9% year-over-year in January, a slight increase from December’s 1.8% and in line with expectations.
The increase in headline CPI was largely driven by higher energy prices, notably gasoline (+8.6%) and natural gas (+4.8%).
The Goods and Services Tax (GST) holiday, which ran from mid-December to mid-February, provided some relief. This temporary measure helped reduce prices for food purchased at restaurants (-5.1% y/y), alcoholic beverages (-3.6% y/y), and toys, games, and hobby supplies (-6.8% y/y).
Core inflation measures, which are closely monitored by the Bank of Canada, showed a more mixed picture. CPI excluding food and energy remained stable at 2.2% y/y, but the seasonally adjusted annualized rate of CPI excluding food and energy slowed to 1.6% in January from 4% in December.
However, the Bank of Canada’s preferred core inflation measures, CPI-Trim and CPI-Median, both edged higher to 2.7% y/y, signalling that underlying inflation pressures remain. Moreover, the three-month annualized trend of core inflation has been tracking above 3%, suggesting that core inflation “could continue to rise in the coming months “should continue to grind higher,” noted TD economist James Orlando.
Impact on Bank of Canada rate cut expectations
Following today’s release, market odds of a 25-basis-point rate cut at the Bank of Canada’s March 12 policy meeting dropped to under 30%.
“There is too much underlying inflationary pressure in Canada to warrant an inflation-targeting central bank easing monetary policy further,” wrote Scotiabank‘s Derek Holt.
“The state of the job market also does not merit further easing,” he added, referencing January’s higher-than-expected job growth. “Canadian inflation remains too warm for the Bank of Canada to continue easing.”
However, economists remain divided on the Bank of Canada’s next move. Some, like Oxford Economics, still expect the Bank to continue cutting rates in the months ahead.
“The Bank of Canada will be in a bind as it weighs competing concerns over higher prices from the tariffs with the drag on economic growth,” noted Tony Stillo, Director of Canada Economics at Oxford.
“We believe the BoC will look through the temporary price shock and instead focus on the negative implications for the Canadian economy and heightened trade policy uncertainty, leaving it on track to lower the policy rate another 75bps to 2.25% by June 2025,” he added.
TD’s Orlando also underscored the challenge the Bank of Canada faces in balancing competing priorities.
“Does it weigh the downside risks to the economy in the face of U.S. tariffs, or does it focus on recent economic strength and the impact this is having on inflation?” he questioned, while acknowledging that much can change between now and the next BoC policy meeting.
“There is plenty of time between now and March 12, and if the President’s first few weeks are anything to go by, a lot could change before then,” he added.
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Last modified: February 18, 2025
