OTTAWA – Economists are more confident the Bank of Canada might pause its interest rate cuts next month — tariffs notwithstanding — as Canada’s annual inflation rate ticked back up in January.
Statistics Canada’s consumer price index on Tuesday reported the annual inflation rate rose to 1.9 per cent last month, up from 1.8 per cent in December, as the effects from a full month of the federal government’s GST break were offset by higher fuel costs.
“I think what’s really the key here is that some of the core measures of inflation, again, were a little bit hotter than maybe the Bank of Canada would like to see,” said CIBC senior economist Andrew Grantham in an interview.
“There’s a lot of moving pieces here, but overall maybe a touch stronger than we expected in terms of the underlying inflation trends.”
The agency reported prices at the pump jumped 8.6 per cent year-over-year, in large part because of a 25.9 per cent spike in Manitoba, where the province reintroduced its provincial gas tax after a temporary suspension through 2024.
Meanwhile, natural gas prices rose 4.8 per cent annually in January, with an increase in demand pushing prices higher in Ontario and Quebec compared with an oversupply a year ago, Statistics Canada said.
Restaurant food prices declined by a record 5.1 per cent from a year ago, helping to tame the headline inflation number.
Statistics Canada said without the federal tax break, overall inflation would have risen to 2.7 per cent, up from 2.3 per cent in December.
The GST tax break ended over the weekend after two months.
“It is a little bit concerning,” Grantham said of the 2.7 per cent figure, but added a lot of it stems from rising gasoline prices.
He said CIBC is expecting inflation to be “a little bit” over two per cent by March as the GST break’s impact fades, along with the effect of gas prices.
“These prices and levels that we’re at at the moment will converge a little bit, and will accelerate. But not as much as that 2.7 per cent excluding the GST impact would suggest,” Grantham said.
He said if not for the threat of tariffs from the United States, the Bank of Canada might look to hold its policy interest rate on March 12.
The central bank brought its benchmark rate down to three per cent in January, its sixth consecutive rate cut.
“We continue to lean to the view that the (Bank of Canada) will take a pause at their next decision, although developments on the tariff front may yet have a big say in that call,” BMO chief economist Doug Porter wrote in a note to clients.
The Bank of Canada held a lengthy discussion on the possibility of tariffs ahead of its decision to cut rates last month. Notably, even in the absence of tariffs, the threat itself was weighing on the Canadian economy.
The council agreed a quarter-percentage-point reduction in the benchmark rate would be helpful to support growth and better balance inflation risks.
Stephen Brown, deputy chief North America economist at Capital Economics, said in a note to clients there was “clear evidence” in Tuesday’s report that underlying inflation pressures were building.
“That suggests the Bank of Canada is getting close to the end of its loosening cycle, although the outlook for monetary policy ultimately hinges on whether President (Donald) Trump soon imposes stiff tariffs on imports from Canada,” Brown said.
The annual inflation rate continues to face upward pressure from mortgage interest costs, increasing at a rate of 10.2 per cent from a year ago, though this is the 17th consecutive month of deceleration after a peak of 30.9 per cent in August 2023.
With an increasing share of inflation components rising faster than three per cent in January, Royce Mendes, managing director and head of macro strategy at Desjardins, said he’s sticking with his belief that the central bank will hold rates steady when it meets again in March, “but that call is still contingent on tariff news and upcoming data releases co-operating.”
This report by The Canadian Press was first published Feb. 18, 2025.
