By Promit Mukherjee
OTTAWA (Reuters) -Canada’s annual inflation rate inched up to 1.9% in January from the previous month as higher gasoline and natural gas costs reduced the impact of a sales tax reprieve on broader consumer prices, official data showed on Tuesday.
The core measures of the consumer price index, which have not declined as fast as the inflation rate in the past few months, edged up too.
January’s CPI reading racked up a six-month record of inflation coming in at or below the 2% mark – the mid-point of the Bank of Canada’s 1%-3% target range – but underlying price pressures reduced currency swap market bets for an interest rate cut next month.
They now see an almost 63% chance of no rate cut in March, compared with 56% before January’s inflation data was released.. If U.S. President Donald Trump decides to impose tariffs on Canadian imports from March, market expectations for a rate cut could change considerably.
“Stronger inflation amid retailers’ price discounts and budding economic activity in the fourth quarter will likely give the Bank of Canada some confidence to hold interest rates steady at its March meeting,” Andrew DiCapua, Principal Economist, Canadian Chamber of Commerce, said.
“This pause would let policymakers gauge whether current measures are doing enough to support growth in what remains a very uncertain environment,” he added.
Tuesday’s annual inflation reading matched the forecast of analysts polled by Reuters. In December, inflation stood at 1.8%. On a monthly basis, prices were up 0.1% in January, Statistics Canada said.
The government announced a sales tax holiday on a range of products such as food, beverages, restaurant meals and children’s clothing from mid-December to mid-February, helping to ease inflationary pressures, it said.
Prices for the food component of the CPI basket fell 0.6% on a year-over-year basis in January, the first yearly decrease since May 2017, driven by a record 5.1% decline in prices for food purchased from restaurants, the data showed.
Without the tax relief, consumer prices would have risen at a rate of 2.7%, Statscan said. In December, excluding the tax break, prices were up 2.3%.
The Canadian dollar weakened on Tuesday and was trading down 0.13% at 1.4199 to the U.S. dollar, or 70.43 U.S. cents.
Yields on the two-year government bond were up 6.8 basis points to 2.797%.
Economists have said the sales tax break had distorted overall inflation numbers, and that core inflation was a more accurate gauge of consumer price trends.
The BoC has two preferred measures of core inflation – CPI-median and CPI-trim.
CPI-median – or the centermost component of the CPI basket when arranged in an order of increasing prices – rose to 2.7% from an upwardly revised 2.6% in December. CPI-trim – which excludes the most extreme price changes – was up to 2.7% from 2.5% in the prior month.
The upward pressure on inflation in December was led by an 8.6% jump in prices paid by Canadians at fuel pumps, Statscan said.
That was further boosted by a 4.8% rise in natural gas prices and the first year-over-year rise in eight months in passenger vehicle costs.
With prices staying at or below the BoC’s 2% target, the central bank has been able to implement the most aggressive rate easing among the G7 nations. Last month, it reduced the key policy rate to 3%.
(Reporting by Promit Mukherjee; Editing by Dale Smith, Helen Popper and Chizu Nomiyama)
