(OTTAWA) Canada’s annual inflation has been slowing since the summer, but economists predict January’s rise in fuel prices may have hampered that trend.
Observers were encouraged by recent monthly trends, which showed prices rising at a slower pace.
However, TD Bank expects price growth to accelerate between December and January.
“January seems […] likely to be a slight setback,” said TD Economics Director James Orlando, also noting that a one-month rise “doesn’t mean February won’t return to the downtrend. »
Statistics Canada is due to release its consumer price index for January on Tuesday. The report will include last month’s headline inflation, which compares prices to the same period last year.
Canada’s headline annual inflation fell from its peak of 8.1% in June to 6.3% in December as gasoline prices fell, supply chain problems supplies have eased and interest rates have weighed on spending.
While TD expects price growth to accelerate between December and January, it expects annual inflation for January to be 6.2%. CIBC forecasts a slight increase to 6.4%.
Although inflation has slowed in recent months, progress has been less on food prices. In December, the prices of products sold in grocery stores showed an increase of 11% over one year.
Orlando said food inflation may have eased in the past month due to lower diesel prices, which are affecting transport costs.
“It’s probably not slowing down as quickly as most Canadians would like, but (food) has been one of the slowest moving items in inflation,” Orlando said.
Slowdown this year despite everything
As for longer-term forecasts, most economists remain convinced that inflation will decline significantly this year.
This is partly due to the way inflation is calculated. Since most of the acceleration in price growth occurred last spring and early summer, the annual rate is expected to drop significantly over the next few months.
“When the large price increases we saw last year are no longer factored in later this spring, it will lead to a significant drop in headline inflation,” said Karyne Charbonneau, Chief Business Officer. CIBC Economics.
The Bank of Canada expects annual inflation to fall to around 3% in mid-2023 and return to its 2% target next year.
Last month, the central bank raised its policy rate for the eighth straight time since March 2022, taking it from near zero to 4.5%. This is its highest level since 2007. While announcing this new increase, the central bank specified that it would take a “conditional” break to assess the effects of the rise in interest rates on the economy.
Economists note that interest rate hikes can take up to two years to fully affect the economy.
However, if inflation does not slow as expected and the economy remains warm, the central bank has made it clear that it is ready to resort to further rate hikes.
Orlando said a slight acceleration in prices for a month was unlikely to prompt the Bank of Canada to raise interest rates, noting that the bar for further rate hikes was now higher.
He added that the Bank of Canada knows it has “raised rates to a level that should slow the economy and bring inflation down.”
If there was anything the central bank would be more concerned about right now, it would be the January jobs report, which came in particularly strong, Orlando added.
Statistics Canada reported earlier this month that the economy created a net total of 150,000 jobs last month. With more Canadians looking for or working, the unemployment rate was 5%, hovering around record lows.
On Thursday, Bank of Canada Governor Tiff Macklem said the economy was still in excess demand and the labor market remained too tight.
For inflation to return to 2%, Mr. Macklem argues that “tensions in the labor market must ease (and) wage growth must moderate”.
If things do not go as planned, the governor warned that the Bank of Canada was “(ready) to raise the key rate further”.