Canada CPI Preview: Forecasts from seven major banks, inflation likely eased in January

The first Canadian inflation reading of 2024 should edge lower on falling energy prices and slower food price growth. We expect the consumer price index to rise 3.2% YoY, lower than 3.4% in December. But the underlying details will be closely watched for signs on whether inflation pressures are continuing to trend – albeit gradually – towards the BoC’s 2% target. Stripping out volatile components like food and energy, we expect price growth to hold at 3.4% YoY with the recent months’ mixed underlying drivers continuing. More than a quarter of price growth overall is still coming from higher mortgage interest costs that are a direct result of earlier BoC interest rate increases. If we exclude that component, price growth would already be back within the BoC’s 1% to 3% inflation target range. The share of the CPI basket seeing abnormally high inflation has also been declining. Roughly 51% of the consumer basket was growing at more than 3% over the last three months, down from a peak of 77% of the basket in July 2022. But we also look for YoY growth in the BoC’s preferred broader trim and median measures of underlying price growth to hold steady at 3.7% and 3.6%, respectively, in December.

In Canada, we will have inflation data which is likely to show inflation hovering just above 3%. This won’t be enough to trigger an imminent Bank of Canada policy rate cut, but we do expect them to start easing by the June policy meeting.

We look for CPI inflation to slow by 0.2pp to 3.2% YoY in January as prices rise by another 0.4% MoM. Core inflation measures should help to reinforce the limited progress towards 2%, with a 0.1pp decline for CPI-trim/median to 3.55% YoY on average as 3m rates of core CPI edge higher to 3.8%. The BoC might not put as much weight on 3m rates of CPI-trim/median going forward given its recent shift towards more generalized core inflation, but this still speaks to the persistence of underlying price pressures that will make it difficult for the Bank to deliver a dovish message in March.

Although gasoline prices treaded water during the month, headline prices may still have risen 0.4% before seasonal adjustment, supported by higher food prices. Despite this increase, the 12-month rate could still go down from 3.4% to 3.3%, thanks to a highly positive base effect. The core measures preferred by the BoC, meanwhile, could have improved only marginally, with the CPI-trim easing from 3.7% to 3.6% and the CPI-med remaining unchanged at 3.6%.

After accelerating in the prior month, headline inflation should partially ease again in January with gasoline prices falling on the month and food price inflation easing. However, mortgage interest costs and rising rental prices should keep the monthly trend in ex-food/energy prices on a firmer track than would be consistent with a 2% inflation target. On a YoY basis, inflation excluding food/energy could actually accelerate slightly. The BoC’s CPI-trim and median measures of inflation accelerated in December, and are unlikely to show much improvement in the latest month. Indeed, the 3-month annualized rates will likely accelerate, and on a YoY basis, we only forecast a slight deceleration in the trim measure.

We expect a 0.5% MoM increase in headline CPI in January with the YoY reading remaining at 3.4%. Shelter prices are expected to remain strong, though some recent comments from BoC officials have been interpreted as looking through strength in shelter inflation. While officials may be unlikely to raise rates again due to shelter inflation alone, the path of shelter inflation will still likely be a very important consideration in setting policy. The path of the core inflation measures will remain the most important element of monthly inflation reports. The 3-month average annualized pace of CPI-median and CPI-trim will likely remain elevated in January as a weaker reading from October drops out of the 3-month calculation. And the preferred leading indicators of core inflation like the CFIB price plans survey still suggest that 3-month core could drop closer to 2.5% by mid-year, but currently, BoC officials would need at least a few months of 3-month core inflation around 2.5% to feel comfortable lowering rates.

For January, headline inflation is expected to tick only modestly lower to 3.2%, while core inflation is also expected to ease only slightly. Moreover, if these forecasts are realized, both headline and core inflation would remain some distance above the central bank's 2% inflation. Against that backdrop, we don't expect the BoC to be in a rush to lower interest rates and our view remains that the central bank won't deliver an initial 25 bps rate cut until its June monetary policy announcement.