Inflation in Canada rises to 1.9%, with higher energy prices offsetting GST break

Canada’s Inflation Rises, Keeping Rate Hike Decision Uncertain

Canada’s annual inflation rate edged higher in January, reaching 1.9% compared to the previous year, as rising energy prices countered the effects of a federal tax holiday on food and other goods. While this figure remained below the Bank of Canada’s 2% target, it signals potential inflationary pressures building beneath the surface.

Inflation climbs Despite Tax Break

Statistics Canada reported on Tuesday that the Consumer Price Index rose 0.1% monthly, marking the first increase in three months. Although analysts had predicted this increase, it triggered adjustments in financial markets, leading to decreased speculation about further rate cuts from the Bank of Canada. Interest rate swap markets currently estimate a 40% probability of another quarter-point cut at the central bank’s upcoming meeting on March 12, down from earlier projections.

The Bank of Canada’s preferred core inflation measures, excluding volatile price fluctuations, averaged 2.7% in January, up from 2.55% the previous month. This indicates a strengthening underlying inflationary trend despite the temporary impact of the Goods and Services Tax (GST) holiday, which commenced in mid-December and concluded on February 15.

rate Cut Uncertainty

Following six consecutive interest rate cuts, bringing the benchmark policy rate to 3% in January, uncertainty surrounds the future direction of monetary policy. with inflation below target and the policy rate approaching its estimated neutral level, further rate cuts are not guaranteed. However, a potential trade conflict with the United States, notably tariffs imposed on Canadian imports, could necessitate aggressive rate cuts to support the Canadian economy.

“The GST holiday kept headline inflation below the 2 percent target in January, but there is clear evidence that underlying inflation pressures are building,” noted Stephen Brown, deputy chief North America economist at Capital Economics. “That suggests the Bank of Canada is getting close to the end of its loosening cycle, even though the outlook for monetary policy ultimately hinges on whether President Trump soon imposes stiff tariffs on imports from Canada.”

Sector-Specific Insights

The GST holiday contributed to significant price reductions in certain sectors. Canadians experienced a 3.6% decrease in alcoholic beverage costs and a 6.8% decline in toy, game, and hobby supplies compared to the previous year. Conversely, gasoline prices surged 8.6% annually, reversing December’s 3.5% increase. Manitoba witnessed an especially sharp jump, with gasoline prices soaring 26% due to the reinstatement of provincial sales tax after a year-long suspension. Natural gas prices also rose, increasing 4.8% year-on-year after declining 5.5% in December.

Despite easing slightly, shelter costs remained the primary driver of overall inflation. Mortgage interest costs climbed 10.2% compared to the previous year, compared to 11.7% in December, while rent increased 6.3%, down from 7.1% in the previous month.

“Today’s report offered no major surprises, a positive sign on the inflation front. The interest rate outlook remains uncertain,” observed Douglas Porter, chief economist at Bank of Montreal.”However, as the GST holiday fades from the data in the coming months, headline inflation is likely to rise rapidly, approaching core trends of about 2.5%.We anticipate the Bank of Canada will pause its rate cuts at their next meeting on March 12. Nonetheless, developments concerning tariffs, particularly the potential 25% U.S. tariff on Canada and Mexico looming on March 4,could significantly influence this decision.”

How will geopolitical factors influence Canada’s inflation trajectory?

Calculating Inflation: Canada’s Inflation Rates Evolve

We speak with Dr. Andrew Thompson,Chief Economist at Royal Bank of Canada,and Professor Lisa Kardell,inflation specialist at the University of Toronto,to discuss Canada’s inflation trends.

Recent Inflation Data

Archyde: Statistics Canada recently reported a 1.9% inflation rate. Why is this figure important?

Dr. Andrew Thompson: Despite being below the 2% target, this inflation rate signals that underlying pressures are building. The GST holiday in late 2021 temporarily suppressed inflation, but it’s now clear that inflation is picking up as those effects fade.

Archyde: Professor Kardell, how have core inflation metrics performed?

Professor Lisa Kardell: Core inflation measures, excluding volatile items, have been steadily increasing. In January, they averaged 2.7%, up from December’s 2.55%. This trend suggests that inflation is indeed strengthening.

Rate Hikes or Rate Cuts?

Archyde: With inflation below target and the policy rate near its neutral level, what’s next for monetary policy?

Dr.Thompson: The Bank of Canada has loosened policy substantially with six consecutive rate cuts. With inflation picking up and the economy showing signs of recovery, further rate cuts aren’t guaranteed. However, trade uncertainties, like potential U.S. tariffs, could necessitate additional cuts.

Professor Kardell: Additionally, we should monitor consumer expectations for inflation.If they start to anticipate higher inflation, it could become a self-reinforcing trend.

Sector-Specific Impacts

Archyde: Which sectors have experienced significant price changes?

Dr. Thompson: gasoline prices surged due to increased demand and supply constraints, while alcoholic beverages and toys saw price drops due to the GST holiday. Shelter costs, especially mortgages, remain a key driver of overall inflation.

Archyde: Professor Kardell,what do you think about the recent climb in mortgage interest costs?

Professor Kardell: While mortgage interest costs have climbed,they’re still lower than pre-pandemic levels. However, if inflation continues to rise, we could see further increases, making housing less affordable.

Thoughts on Tariffs

Archyde: How could potential U.S.tariffs impact Canada’s inflation dynamics?

Professor Kardell: Tariffs could raise prices for canadian consumers and businesses, adding upward pressure on inflation. The Bank of Canada might need to respond with rate cuts or other accommodative policies to mitigate the economic fallout.

stay tuned to Archyde for more insights into Canada’s economic landscape. Join the conversation: How will geopolitical factors influence Canada’s inflation trajectory? Leave your thoughts in the comments below.