Canada: Lower January Inflation Is Unlikely to Move the Bank off the Sidelines

Though headline inflation moved lower in January, base effects stemming from the GST/HST holiday External link. a year ago played a significant role in keeping year-over-year prices elevated in the month. Services prices accelerated to 3.4% y/y as a result, up from 3.3% in December (graph 1). Under the hood, restaurant prices rose to 12.3%, much higher than 8.5% in the prior month. In addition, price increases were observed in previously tax-exempted items such as alcoholic beverages served in licensed establishments (9.0%) and alcoholic beverages purchased from stores (7.9%). Meanwhile, cellular services inflation eased to 4.9% after accelerating for six months, down from 14.6% in December, largely because of base-year effects.

In contrast to rising services inflation in January, the cost of goods price growth slowed further that month. Gasoline prices fell at a faster pace (-16.7% y/y) relative to December (-13.8%) mainly attributed to base-year effects. In addition, the partial reintroduction of the provincial gas tax in Manitoba in January 2025 no longer influenced the 12‑month movement in gasoline prices. That said, headline inflation would have been about 0.4 percentage points higher in January, at 2.7%, if it weren’t for the elimination of the consumer carbon tax (graph 2). Moreover, food purchased from stores inflation eased to 4.8% from 5.0% the month prior, driven by strong and stable harvests in producing regions that tempered price growth.

Turning to underlying CPI inflation, the average of BoC’s preferred measures of core inflation—CPI median and trimmed mean—slowed in January to around 2.5% y/y. Total CPI inflation excluding food and energy shifted down slightly to 2.4% y/y (from 2.5%), while total CPI inflation excluding the eight more volatile components and indirect taxes slowed down to 2.6% (from 2.8%). Meanwhile, the annualized seasonally adjusted 3-month moving average of these latter series slowed down from 2.4% in December to 1.9% in January (graph 3). Similarly, when this same calculation applied to the Bank’s preferred measures, their average went from 1.6% in December to 1.2% last month—the lowest level since May 2020.

The broad-based slowing in Canadian inflation in January was good news for consumers and policymakers alike. Still, the economy remains in a fragile position, and the forthcoming CUSMA review may mark a pivotal turning point. In addition, our analysis External link. on Venezuela’s recent regime shift adds further uncertainty around the outlook for oil prices and the Canadian economy. However, against this backdrop, the Bank signalled in its previous decision External link. that interest rates are already at levels adequate to help the economy navigate through this period of uncertainty. The January CPI data isn’t likely to change that assessment, although a further deterioration in the economic data just might.