Inflation hit 1.9% in January, driven by rising energy prices, while the GST break kept food prices lower
According to Statistics Canada, rising energy prices offset the impact of the federal tax holiday, pushing Canada's annual inflation rate to 1.9 percent in January from 1.8 percent in December.
The increase was driven by higher energy costs, particularly gasoline and natural gas, while a federal sales tax holiday helped keep consumer prices in check.
Energy prices rose 5.3 percent year over year in January, following a 1.0 percent increase in December. Gasoline prices jumped 8.6 percent compared to the previous year, accelerating from December’s 3.5 percent rise.
According to Statistics Canada, “prices increased the most in Manitoba (+25.9 percent) due to the re-introduction of the provincial gas tax at a lower rate after its temporary suspension from January to December 2024.”
Natural gas prices also increased, rising 4.8 percent year over year in January, following a 5.5 percent decline in December.
The highest monthly increase was recorded in British Columbia, where prices surged 12.8 percent.
The federal GST/HST tax break, which began in December and ended in mid-February, continued to influence consumer prices.
Reuters reported that food prices fell 0.6 percent in January, marking the first annual decline since May 2017. This drop was largely driven by a 5.1 percent decline in restaurant food prices, a record decrease that was more than triple the previous record decline of 1.6 percent in December.
Without the tax relief, inflation would have been higher. According to Statistics Canada, “without the tax relief, consumer prices would have risen at a rate of 2.7 percent.”
Canadians also saw lower prices for alcoholic beverages, which fell 3.6 percent year over year, and for toys, games (excluding video games), and hobby supplies, which declined 6.8 percent.
The cost of purchasing passenger vehicles increased in January, marking the first year-over-year rise in eight months. New vehicle prices climbed 2.3 percent annually, following a 0.9 percent increase in December.
Used vehicle prices continued their downward trend, declining 3.4 percent in January, though the decline was smaller than the 4.1 percent drop recorded in December.
Financial markets reacted to the inflation data by lowering expectations for an interest rate cut.
The Globe and Mail reported that “interest rate swap markets now put the odds of another quarter-point cut at the central bank’s next meeting on March 12 at about 40 percent,” down from previous projections.
Underlying inflation pressures also increased. The Bank of Canada’s preferred core inflation measures, CPI-median and CPI-trim, both rose to 2.7 percent in January, up from an average of 2.55 percent in December.
Reuters noted that core inflation has not declined as fast as the headline CPI in recent months, suggesting persistent price pressures.
Bank of Montreal chief economist Douglas Porter commented on the latest inflation figures, stating, “No big surprises in today’s report, which is generally a good thing on the inflation front, and we’ll call this one a draw on the interest rate outlook front.”
He added that “as the GST holiday lifts from the data in the next two months, the headline tally will likely quickly rise to roughly match current core trends of closer to 2.5 percent.”
The Bank of Canada has cut interest rates six consecutive times, bringing its policy rate to 3 percent in January. However, uncertainty remains over future rate decisions.
The Globe and Mail cited Stephen Brown, deputy chief North America economist at Capital Economics, who wrote, “That suggests the Bank of Canada is getting close to the end of its loosening cycle, although the outlook for monetary policy ultimately hinges on whether President [Donald] Trump soon imposes stiff tariffs on imports from Canada.”
A potential US trade policy shift could influence the Bank of Canada’s next move. Reuters reported that if new tariffs are imposed on Canadian imports, market expectations for a rate cut could change considerably.
Andrew DiCapua, principal economist at the Canadian Chamber of Commerce, stated, “Stronger inflation amid retailers’ price discounts and budding economic activity in the fourth quarter will likely give the Bank of Canada some confidence to hold interest rates steady at its March meeting.”
Inflation rates varied across Canada, with prices rising faster in six provinces, remaining unchanged in two, and falling in two others.
Manitoba and Saskatchewan recorded the highest inflation increases, primarily due to rising energy costs. Excluding energy, the CPI in these provinces increased by 1.8 percent year over year.
Shelter costs remained the largest contributor to overall inflation, though the pace of increase slowed.
Mortgage interest costs rose 10.2 percent year over year in January, compared to 11.7 percent in December. Rent increased 6.3 percent annually, down from 7.1 percent the previous month.
Despite inflation remaining below the Bank of Canada’s 2 percent target, economists warn that underlying price pressures are building.
With the sales tax break ending in February and energy costs rising, inflation could trend higher in the coming months.
