Canadian inflation data shows growth is slowing much faster than anticipated. Statistics Canada (Stat Can) released the Consumer Price Index (CPI) for January, showing annual growth slowed significantly more than the consensus forecast. Most of the remaining pressure driving inflation is being driven by mortgage interest costs. If excluded, like in many advanced economies, CPI would be smack on the central bank’s target rate for inflation.
Canadian Headline Inflation Dropped Much Faster Than Expectations
Canadian headline numbers came in significantly lower than expectations. CPI annual growth came in at 2.9% in January, a significant trim from the 3.4% reported a month before. Experts had a consensus estimate of 3.3%, so needless to say this was a huge surprise.
Canadian Inflation Continues To Moderate
The 12-month change in the consumer price index (CPI) and CPI excluding gasoline.
Source: Statistics Canada.
“There is little debate on this one—it’s a much milder reading than expected, especially given the high-side surprise seen in last week’s round of U.S. inflation reports, a nice contrast,” explained Douglas Porter, Chief Economist at BMO.
He sees downward pressure on price growth across the board, but a handful of items are driving most of last month’s move.
Plummeting annual growth for gasoline prices (-4.0%) did most of the heavy lifting. Excluding gas, CPI slowed to 3.2% annual growth, trimming 0.2 points from the previous month. That’s a lot of downward pressure based on just gas.
Unusually large movements were also observed in a few other areas, applying the rest of the downward momentum. Monthly declines in airfare (-23.7%) and clothing (-3.3%) were significant, though it’s hard to see these as long-term movements. Grocery also made the smallest advance in years (+0.1%), helping to moderate pressures.
“While there were a few random drivers—such as a deep drop in airfares—the report was broadly lower than expected, with all major measures of core inflation also taking a step back (trim down 3 ticks to 3.4% and median down 2 ticks to 3.3%),” wrote Douglas Porter, chief economist at BMO.
Canadian Inflation Would Be Just 2% If Mortgage Interest Is Excluded
The only area working against the data is shelter costs. Annual growth for rental prices (+7.7%) continues to surge, even showing some acceleration. At the same time, mortgage interest costs (+27.4%) only advanced slightly, but remain astronomically higher.
“The latter are the number one driver of inflation, and inflation excluding mortgage interest costs is now at 2.0% on the button,” highlights Porter.
He also points out that if mortgage interest was excluded, CPI would be at 2.0% exactly.
It’s worth noting that Canada’s inclusion of mortgage interest is unusual. Neither the EU’s Eurostat or the US BLS include mortgage interest in their CPI calculations. The latter instead, explains that mortgage interest is considered a capital expense for an investment, not a regular consumption.
The recent data highlights Canada’s somewhat circular approach to including mortgage interest. Its largest inflation driver is mortgage interest, which itself is priced relative to inflation expectations. Genius.
Canada’s Central Bank Likely Hesitant, But Cuts May Come By June
Progress on inflation is even being seen in the BoC’s preferred measure, Core CPI. However, both numbers remain above the target rate of 3%, which the central bank will not be happy to see.
“While no doubt welcome news, the Bank of Canada will likely remain cautious in the face of still-strong wage gains, firm services prices, and the reality that core inflation is still holding above 3%,” said Porter.
Adding, “But clearly today’s result makes rate cuts much more plausible in coming months, and we remain comfortable with our call that the Bank will begin trimming in June.”
A forecast that’s similar to those from most of the country’s large institutions. That is, if consumers don’t get ahead of themselves and go on a spending spree in anticipation of lower rates, instead of waiting for them.
