Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation rose to 1.9% in January, remaining in line with the BoC’s inflation target. However, the details show a tug-of-war between a reduction in inflation due to the temporary GST holiday and increased pressures from higher energy prices and some broadening in inflationary pressures. As such, excluding the effect of indirect tax, CPI rose by 0.4% m-o-m, pushing the y-o-y higher at 2.6%, still consistent with the BoC’s inflation target. The average of the Bank of Canada’s core inflation measures rose to 2.70% and remained below 3% (the upper band of the inflation target) for the eighth consecutive month.
The breadth of inflationary pressures increased slightly in January. The share of components of CPI rising by more than 5% was 15% in January, compared to 14% in December, and the share of components increasing by more than 3% rose to 31% from 22.5%. While both measures are in line with their historical norm (see Fig 1.), the increase could suggest some stickiness in inflation.
The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures remained elevated in January. As such, we observe that the 3-month annualized changes in the main CPI components are below 3% (see Fig. 2), except for shelter (+3.5%), with the 3-month annualized changes in headline CPI at 1.7%. However, the GST holiday is having a significant drag on the momentum measures. Excluding the effect of indirect taxes, the CPI momentum is at 4.1%, well above the BoC’s target.
Similarly, the momentum of BoC’s core measures remained above 3% in January at 3.04% for a fourth consecutive month (see Fig 2). This suggests some stickiness in the core measures and some slightly stronger price pressures in recent months despite the GST holiday. While it could prove temporary, it is likely to draw the attention of BoC.
Overall, there is some drag on inflation from the GST holiday; underlying inflation suggests that inflationary pressures are sticky and prices have increased faster in recent months than the BoC would want to see. This will not be a welcome development by the central bank. Stronger underlying inflationary pressures, coupled with a relatively robust labour market in recent months, reduces the likelihood of a cut at that BoC’s meeting in March. With this in mind, it is becoming likely that the BoC will opt for a pause at the March meeting to assess the situation better.
In Alberta, inflation remained at 2.5% in January. An acceleration in transportation costs due to higher gasoline prices compared to last was the main source of upward pressures on inflation. Shelter costs accelerated to 4.9% y-o-y, contributing 1.3pp due to rent and ownership costs. Food price inflation decelerated sharply to 0.5% y-o-y thanks to the tax holiday. Inflation excluding food and energy (a core inflation measure) remained 2.6%, above the national measure and one of the highest amongst the provinces.
The Consumer Price Index (CPI) increased 0.1% m-o-m non-seasonally-adjusted in January and the inflation rate rose to 1.9%. This was in line with expectations. The temporary GST holiday introduced in December 2024 continued to act as a drag on CPI in January. As a result, food prices declined by 0.5% m-o-m, clothing by 0.7% m-o-m, alcohol, tobacco and cannabis by 0.6% m-o-m%, and recreation, education and reading material by 1.6% m-o-m.
Excluding the impact of the change in indirect tax, CPI was up 0.4% m-o-m in January and 2.6% y-o-y, compared to 2.2% in December and 1.7% y-o-y in November.
On a year-on-year basis, only five of the eight major CPI components accelerated in January. Transportation costs accelerated to 3.4% y-o-y from 2.3%, mainly due to an increase in gasoline prices (+8.6% y-o-y).
Clothing and footwear prices were a smaller drag on inflation than in December (-1.3% y-o-y, reducing inflation by 0.1pp), despite the continued GST holiday on children’s clothes and continued sales on other items.
Food price inflation decelerated to -0.6% y-o-y, its slowest since April 2017, as a result of the GST holiday and was the main source of drag on inflation in January (reducing inflation by 0.2pp).
Shelter cost inflation was unchanged at 4.5% and remained the main source of inflation, contributing 1.3pp to headline inflation, mainly due to higher rent (contributing 0.4pp) and mortgage interest costs (contributing 0.4pp). A strong increase in natural gas prices also added to shelter inflation.
In January, goods price inflation accelerated to 1.0%, while service price inflation eased to 2.8%, its lowest since August 2021. Energy prices pushed inflation higher, increasing by 5.3% y-o-y compared to the same month last year, after da modest 1.0% y-o-y in December. Excluding food and energy, prices eased 0.1% m-o-m in January and increased by 2.2% compared to the same month last year. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, rose to 2.1%, its highest in a year.
Looking at the BoC’s core measures of inflation, they increased in January, but remained below 3%. CPI-Trim was 2.7%, after 2.5% in December, while CPI-Median was 2.7% after 2.6% the prior month. As a result, the average of the two measures rose to 2.70%, below 3% for tenth consecutive month.
By provinces, headline inflation was the highest in Manitoba (+2.7%), Alberta (+2.5%), Saskatchewan (+2.4%), BC (+2.2%), and Ontario (+1.7% y-o-y), while it was the lowest in Newfoundland (+0.8%), PEI (+1.3%), and Nova Scotia (+1.3%).
Core inflation, or CPI excluding food and energy, with the highest in Alberta (+2.6%), BC (+2.3%), Ontario (+2.1%) and Saskatchewan (+2.0%). It was the lowest in Newfoundland (+0.9%), PEI (+1.9%), and Nova Scotia (+2.1%).
In Alberta, prices increased 0.2% m-o-m and inflation stayed at 2.5% in January, remaining amongst the highest at the provincial level. Three out of eight CPI components decelerated on the month. Shelter costs accelerated to 4.9% y-o-y from 4.6% y-o-y and remained the main source of inflation, contributing 1.3 percentage points to inflation. Rent costs accelerated to 7.2% y-o-y (contributing about 0.4pp to inflation) from 6.8% y-o-y but are no longer rising faster than in other provinces. Owned accommodation costs also decelerated slightly to 6.1% y-o-y (contributing 1.0pp to inflation) from 6.3% y-o-y.
Food prices inflation eased to 0.5% y-o-y from 1.7% y-o-y, as a result of the GST holiday.
Transportation costs accelerated to 5.2% compared to last year, as a result of higher gasoline prices (+18.9% y-o-y). This component contributed 0.8pp to inflation.
Goods price inflation increased to 1.6% y-o-y from 0.6% y-o-y, while services prices inflation eased to 3.4% y-o-y from 4.1%. Inflation excluding food and energy remained at 2.6%, which is higher than the national measure. Energy costs rose 6.6% y-o-y compared to a 3.5% y-o-y in December.
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Independent Opinion
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