Canada's inflation slows in January, making rate pause more likely

Inflation contiunes to raise concerns in Toronto

By Ismail Shakil and Steve Scherer

OTTAWA (Reuters) -Canada's annual inflation rate eased more than expected in January to 5.9%, data showed on Tuesday, which should allow the Bank of Canada to keep interest rates steady at its next meeting while it lets previous rate hikes sink in.

Analysts had expected inflation to edge down to 6.1% from 6.3% in December. Month over month, the consumer price index rose 0.5%, Statistics Canada said, again lower than analysts' forecast of a 0.7% gain, after a 0.6% decline in December.

Statscan cited a base effect, or comparison with last year's strong result, that should persist through June. In January 2022, prices surged at a time of Russia-Ukraine tensions and supply chain disruptions, and they increased to a peak of 8.1% in June.

The inflation figure "allows (the Bank of Canada) to stay on hold in March, despite the fact that the labor market was extraordinarily hot in the month of January," said Andrew Kelvin, chief Canada strategist at TD Securities.

The Bank of Canada in January raised its benchmark interest rate to a 15-year high of 4.5% and became the first major central bank to say it would hold off on further increases as long as prices eased in line with its forecast.

Then Canada's economy smashed expectations by adding a net 150,000 jobs in January, data showed earlier this month.

Before the inflation figures were released, money markets saw a 100% chance for another rate increase this year. Now they see a roughly 80% chance.

The bank forecasts inflation to slow to about 3% by the middle of 2023, and to come down to its 2% target next year. The next inflation report will come out after the central bank's next policy-setting meeting on March 8.

The Canadian dollar was trading 0.4% lower at 1.35 per U.S. dollar, or 74.07 U.S. cents.

Excluding food and energy, January prices rose 4.9% compared with a 5.3% increase in December.

The average of two of the central bank's core measures of underlying inflation, CPI-median and CPI-trim, came in at 5.1% compared with 5.3% in December.

The January inflation figures give the Bank of Canada "somewhat greater comfort in their decision to go on pause at least temporarily," said Doug Porter, chief economist at BMO Capital Markets.

"A low-side inflation read will definitely prove to be a nice antidote to some of those high-side surprises," he said.

The figures show prices coming down faster in Canada than in the United States, where annual inflation gained 6.4% in January. Goldman Sachs and Bank of America said they expect the U.S. Federal Reserve to raise interest rates three more times this year.

On Friday, Bank of Canada Deputy Governor Paul Beaudry said its policy-setting path can diverge from central banks in other countries as long as inflation is ultimately brought down to target.

Adding to the favorable base effect, cellular services fell 7.9% annually in January after increasing 2.5% in December, and consumers paid 6.2% more for passenger vehicles compared with 7.2% in December.

Mortgage interest costs, on the other hand, rose 21.2% annually in January, the largest increase since 1982, while food prices rose 10.4%, slightly faster than the 10.1% in December.

Separately, retail sales rose 0.5% in December, in line with forecasts, and Statscan's flash estimate for January puts retail sales up 0.7% on the month.

(Reporting by Ismail Shakil and Steve Scherer; Additional reporting by Fergal Smith in Toronto and Dale Smith in Ottawa; Editing by Mark Porter and David Gregorio)