Inflation is creeping up again, possibly leading the Bank of Canada to pause cuts to its key interest rate at the next meeting on March 12 following consecutive reductions since June, economists say.
January inflation rose to 1.9 per cent, mainly due to increases in energy prices, Statistics Canada said on Tuesday.
Most economists forecasted the rise in inflation, according to a Bloomberg consensus survey. But the Bank of Canada’s preferred “core” measures of inflation, which account for the effects of taxes and other volatile items, came in higher than expected at 2.7 per cent.
“We continue to believe the Bank of Canada hits the pause button in March,” Desjardins economist Royce Mendes wrote in a note to clients. “But that call is still contingent on tariff news and upcoming data releases co-operating.”
An impending 25 per cent U.S. tariff on Canada and Mexico in March is still on the table.
Based on the latest data, Canadians might want to consider delaying the purchase of a new vehicle. Prices at the pump jumped 8.6 per cent while car prices increased for the first time in eight months, both on a year-over-year basis, StatCan said. Prices for used vehicles, however, continued to decline.
The overall inflation boost was partly offset by a decline in prices for food purchased from restaurants and other goods and services impacted by the temporary GST/HST break.
Restaurant costs fell 5.1 per cent year-over-year, while alcohol costs dropped 3.6 per cent. Prices for toys and games (excluding video games) also declined.
But the tax holiday ended last weekend, and economists expect its effects on inflation to normalize going forward. In December, the annual rate of inflation dropped to 1.8 per cent from 1.9 per cent in November, with most of the deceleration attributed to the tax break.
Annual shelter inflation, which includes rents and mortgage interest costs, also eased in January despite being among the main contributors to total price growth.
In a recent report, the Bank of Canada emphasized its concern around persistent shelter inflation. “Because the housing vacancy rate is near a record low, past interest rate cuts and the recent changes in mortgage rules could lead to higher-than-anticipated house prices and rents,” it wrote.
TD economist James Orlando said the central bank is in a tough spot.
“Does it weigh the downside risks to the economy in the face of U.S. tariffs, or does it focus on recent economic strength and the impact this is having on inflation?” he said in a note to clients, adding that Tuesday’s data is paring back market expectations of another 25-basis-point cut next month.
“There is plenty of time between now and March 12, and if (Trump’s) first few weeks are anything to go by, a lot could change before then.”
On Friday, Bank of Canada governor Tiff Macklem is set to deliver a speech to the Mississauga Board of Trade and the Oakville Chamber of Commerce about recent trade tensions with the U.S. and interest rates.
