Still, price growth is beginning to moderate
The consumer price index (CPI) is showing softer inflation than anticipated, with pressures gradually easing – but the breadth of inflation remains wider than the central bank’s 2% inflation target, according to RBC Economics.
Shelter inflation remains persistent, according to RBC economist Abbey Xu, driven by the delayed impact of higher interest rates on mortgage costs and the ongoing housing shortage, which sustains upward pressure on rental prices.
CPI growth decelerated to 2.9% year-over-year from December’s 3.4%, slipping below the upper limit of the BoC’s 1% to 3% target range for the first time since June 2023. Energy and food prices continued their deceleration, contributing to the moderation in overall inflation. Energy prices, notably gasoline, declined by 2.7% year-over-year, while residential natural gas prices in Alberta and Saskatchewan dropped due to the removal of the carbon tax.
Inflation across markets showing signs of slowdown
Food inflation also slowed, driven by reduced price growth in both store-bought items and dining out, reflecting broader economic trends. Excluding food and energy, inflation moderated to 3.1%. The BoC’s preferred core measures, including median and trim indices, also exhibited deceleration, signalling a broader slowdown in inflationary pressures, the report emphasized.
Airfare prices notably declined by 14.3% year-over-year for the 10th consecutive month, while clothing and footwear prices dropped by 1.3%, possibly influenced by discounted winter apparel following a milder winter season.
While the monthly scope of inflationary pressures remained relatively stable, it notably narrowed compared to peak pandemic levels. The percentage of the CPI basket experiencing growth rates exceeding 5% declined from 68% in May 2022 to 28% in January 2024.
Xu said the lingering effects of previous rate hikes continue to manifest in consumer prices, particularly evident in the persistent growth of mortgage interest costs, which rose by 27.4% year over year. Home rent prices maintained an upward trajectory, although homeowners’ replacement costs slightly decreased due to slower house price growth.
Looking ahead, Xu noted the most plausible scenario suggests a downward trajectory for inflation, as per-capita GDP and consumer spending continue to decline. She said a robust labour market performance in early 2024 affords the BoC flexibility in delaying interest rate cuts until firmer signs of inflation control emerge. As such, the base case assumes a potential initiation of interest rate cuts by the BoC around mid-year.
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