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Encouraging news on the Canadian inflation front

28 February 2023

Consumer prices rose 0.5% in January, coming in below consensus. The annual rate of inflation slowed to 5.9% from 6.3% in December. It was the first annual rate of price growth under 6% since February of last year.

Higher gasoline prices contributed the most to the month-over-month increase, followed by a rise in mortgage interest costs and meat prices.

Cellular services prices fell 7.9% year-over-year as some Boxing Day sales remained available in January.

While the mortgage interest costs index continued to rise – up 21.2% in January – we saw a slowing in the year-over-year increase in shelter prices to 6.6%, following a 7.0% increase in December. With the cooling of the housing market, we saw an easing in the growth in home replacement costs (+4.3%) and other owned accommodation expenses (+1.1%).

On a 12-month basis, the Bank of Canada’s (BoC) trim and median inflation measures – which strip out volatile components of the core inflation measure – edged lower to reach 5.1% and 5.0%, respectively. In three-month annualized terms, both measures eased to sit at 3.5%. 

The BoC uses three measures of core inflation because no single measure is best. Depending on the circumstances, one may be a better indicator of inflationary pressure. 

What to watch

Inflation is still a long way from 2%, but we have been seeing an easing in multiple measures of core inflation. While we are unlikely to see a smooth path towards lower inflation, the January report is positive as it gives the Bank of Canada some offsetting data to the strong employment numbers from earlier this month, which suggested that more work might be necessary to curb inflation. This inflation data, combined with signs of easing wage gains in 2023, suggest that the rapid rise in interest rates is having the desired effect.

A recent report by CIBC Economics notes how compositional effects in the labour force have had a major influence on the trajectory of average wages. Last year’s average wages rose 4.8%; however, since January 2020, we have seen major swings in the share of full-time employment in low-paying jobs. CIBC found that “about a fifth of measured wage growth is attributable to compositional changes.” While the labour market is tight, the wage number overstates the overall strength of the labour market. If we start to see a reversal in the compositional shift, which is likely with the level of immigration, then a large part of the current wage pressure would dissipate.

Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.

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