Inflation as measured by the Consumer Price Index (CPI) slowed in January to below 6% year-on-year. At 5.9%, the headline inflation rate is now at its lowest level since February 2022, which is the first real good news since the Bank of Canada set out to bring price inflation back to the target of 2 %.
What explains the slowdown in inflation in January?
In fact, the inflation rate increased by 0.5% from December to January, mainly due to the increase in the price of gasoline. Measured year-on-year, however, the CPI was down from 6.3% in December to 5.9% in January. There are two explanations for this annual decline. First, what Statistics Canada calls the year-on-year effect: January 2023 prices are compared to those of a year ago, when they had risen a lot. Then, the prices of certain components of the CPI are falling, such as cell phone services, and others are increasing more slowly, such as cars.
Why do food prices continue to rise so much?
Food prices continue to rise faster than other components of the CPI. The annual price increase for food purchased from grocery stores and restaurants reached 10.4% in January, compared to 10.1% in December. This is due, among other things, to the increase in the price of meat, bakery products and fresh vegetables. Food prices are not influenced by rising interest rates, but they do react to a host of factors, such as fertilizer prices, labor costs and weather. The price of chicken, for example, is up 9% from January to December, which is the most pronounced monthly increase since September 1986, according to Statistics Canada. This can be explained, among other things, by the avian flu epidemic which is reducing the supply of chicken. Food is one of the eight components of the Consumer Price Index, and its weight is 15.94% in the index.
Will the slowdown in inflation continue?
Yes, according to most economists, who follow measures of core inflation, that is, stripped of the most volatile items like energy and food. Core inflation measures are still above the Bank of Canada’s target, but “they point in the right direction,” say National Bank economists Matthieu Arseneau and Alexandra Ducharme, in their commentary which followed the release of the most recent CPI data. The three-month annualized variation of these two measures (CPI-tronq and CPI-med) is now 3.5% and 3.4%, which is close to the Bank of Canada’s target of 2%, underline- they.
Can the Bank of Canada claim victory?
Certainly not. At 5.9%, the CPI remains almost twice as high as the central bank’s target. “The slowdown in inflation in January is exactly what the Bank of Canada wants to see, admits Arlene Kish, of S&P Global Market Intelligence, but does that really reflect weak demand? she wonders.
The Bank of Canada has received two contradictory messages since it decided to take a break from raising interest rates, underlines Marc Desormeaux, an economist at Desjardins. The inflation data “suggests that significantly higher interest rates are having the desired effect,” he says. On the other hand, the latest jobs report, which showed solid job creation and rising wages, “suggests that more work will be needed to curb inflationary pressures,” he said.
Inflation should continue to slow in February and March, predicts Sébastien Lavoie, Laurentian Bank’s chief economist, who sees the CPI at 3% in the middle of 2023. The Bank of Canada will surely keep its key rate unchanged at its next decision, in March, according to economists.
Will wages catch up with the rising cost of living?
In Quebec, it is already done, according to the Institut du Québec (IDQ). Wages in Quebec have been rising faster than elsewhere in Canada for several months, a sign of a tighter job market. Between January 2022 and January 2023, wages are up 6.9%, according to the IDQ.
Elsewhere in Canada, the increase in the average hourly wage is around 4% to 5%, which remains lower than inflation. The Bank of Canada believes such hikes are inconsistent with getting inflation back on target and might help support inflation for longer.
There are, however, signs of a decline in wage gains in 2023. The number of active businesses, down in November for the fourth time in five months, “points to a very tangible slowdown in full-time employment in the months to come,” according to Stéphane Marion of the National Bank.
His colleagues Matthieu Arseneau and Alexandra Ducharme point out that the successive increases in the key rate will continue to slow the economy in the coming weeks and that a large proportion of Canadian businesses are expecting a drop in their sales.
