'A big positive shift': What economists say about Canada's inflation numbers

Cooling inflation may prompt the Bank of Canada to start cutting rates as early as June

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Canada’s inflation rate for January decelerated to 2.9 per cent, dropping more than economists were predicting and possibly opening a window for the Bank of Canada to start cutting rates as early as June. Here’s what economists are saying about the numbers.

‘The right direction’: Olivia Cross, Capital Economics

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The Bank of Canada will be pleased with January’s inflation report, and not just because the headline rate slowed more than expected, said Olivia Cross, North America economist at Capital Economics.

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“The Bank of Canada will be pleased to see the more marked easing in its measures of core inflation,” Cross said, in a note following the release of data on Feb. 20 by Statistics Canada.

Month-over-month core inflation rose 0.1 per cent excluding food and energy, slower than the 0.3 per cent gain in December.

The Bank of Canada‘s preferred measures — CPI-trim and CPI-median — both slowed to 3.4 per cent and 3.3 per cent respectively, from 3.7 per cent and 3.5 per cent.

Still, Cross sounded a note of caution.

“January’s inflation print was a big positive shift in the right direction, but the Bank of Canada will need to see this trend continue before it will be comfortable pivoting to rate cuts,” she said. “After all, we saw headline inflation fall below three per cent in June, but this was followed by a series of sticker inflation prints.”

Capital expects the first rate cut to come at the central bank’s June 5 meeting.

Rate cut in June: Andrew Grantham, CIBC Economics

There was plenty of evidence in the latest inflation reading that elevated interest rates are starting to cut into discretionary consumer spending, said Andrew Grantham, an economist with Canadian Imperial Bank of Canada.

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“The unexpectedly large declines in airline fares and clothing prices may be a sign of weakness in consumer spending, but could also partly reflect some data volatility,” Grantham said in a note on the inflation report. Airline fares fell 14 per cent year over year. Clothing and footwear fell 1.8 per cent, seasonally adjusted, in the “sharpest monthly decline since April 2020 during the start of the pandemic,” he said.

Even if there were a partial rebound in inflation, it is still on track to come in at 2.9 per cent in the first quarter, the economist estimated.

That is “well below” the Bank of Canada’s forecast of 3.2 per cent inflation in its most recent Monetary Policy Report for the same period.

“So even with GDP growth running somewhat stronger than they expected, we still anticipate that interest rate cuts will start in June,” Grantham said.

‘Sticky’ shelter inflation: Abby Xu, RBC Economics

The share of inflation accelerating at five per cent shrank to 28 per cent in January from a high of 68 per cent in May 2022, wrote Abby Xu, an economist as Royal Bank of Canada, as “the effect of past rate hikes feed into consumer prices persistently with a lag.”

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Still, the “breadth” of inflation is greater than would allow to hit the Bank of Canada’s target of two per cent, she said in a note on Feb. 20.

Xu expects shelter inflation to remain “sticky” as homeowners renew mortgages at higher interest rates and rents stay high due to Canada’s housing supply shortage.

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The economist doesn’t believe the central bank should be in a rush to start cutting.

A stronger-than-expected jobs market gives the Bank of Canada room to wait and see if inflation is really on the way down, Xu said.

“As of now, our base case assumes the BoC starts to lower interest rates around mid-year,” she said.

Blame mortgage costs: Matthieu Arseneau and Alexandra Ducharme, National Bank of Canada

With shelter costs, up 6.2 per cent annually, now the primary driver for inflation, it’s obvious that higher interest rates have slowed the Canadian economy, said National Bank of Canada economists Matthieu Arseneau and Alexandra Ducharme.

“This increase is due to mortgage interest costs, for which the central bank is responsible, and to the rise in rental prices attributable to the dizzying increase in population,” they said in a note after the data came out.

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The difference between overall inflation and shelter inflation is at the widest gap since 1982, said the economists. If housing was excluded, inflation would be at 1.5 per cent.

“Over the coming months, we continue to believe that restrictive monetary policy will further weigh on the economy and the labour market in order to keep in check inflationary pressures outside shelter,” they said.

National Bank is sticking with its June “baseline scenario” for a first interest rate cut, “but this morning’s report has increased the probability of an April rate cut,” Arseneau said in an e-mail.

Fight not over — yet: Charles St-Arnaud, Alberta Central

It’s too soon for the Bank of Canada to declare the fight against inflation over, said Charles St-Arnaud, chief economist at Alberta Central, despite January’s encouraging consumer price index report.

That will be the case, St-Arnaud said in a note, as long as the central bank’s preferred measures of core inflation remain above three per cent, the top end of the bank’s inflation target range.

“We continue to believe that the BoC is unlikely to contemplate rate cuts until inflation has been brought sustainably below three per cent,” he said. “With this in mind, a cut in June looks like the most probable timing.”

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‘Much milder’: Douglas Porter, BMO Economics

Canada’s inflation numbers for January provided “a nice contrast” to those of the United States where the consumer price index accelerated 3.1 per cent — faster than expectations for 2.9 per cent, said Douglas Porter, chief economist and managing director at Bank of Montreal Economics.

“There is little debate on this one — it’s a much milder reading than expected,” said Porter, adding January inflation data is closely watched as it helps to guide businesses on pricing for the rest of the year.

“January can set the tone for inflation, since firms often take the opportunity to adjust prices for the year in this month — and there was little sign of a big January bump this year,” Porter said in his note on the numbers.

For example, prices for furniture and appliances are both down from a year ago “as goods inflation fades,” he said.

But Porter expects the Bank of Canada to remain wary, especially since wage gains remain strong and three- and six-month trends for core CPI remain above three per cent.

“But clearly today’s result makes rate cuts much more plausible in (the) coming months, and we remain comfortable with our call that the bank will begin trimming in June,” he said.

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