January 2025 CPI: A break on the bill, but energy keeps the tab high

“The HST holiday gave Canadians a bit of a break on prices for alcohol, food, and clothing—enough to bring restaurant prices down for the first time since 2017. However, that relief was overshadowed by higher energy prices which kept overall inflation pressures elevated.

Core inflation still shows persistent underlying pressures, and volatile elements like energy will continue to swing the numbers in the months ahead. Even so, stronger inflation amid retailers’ price discounts and budding economic activity in the fourth quarter, will likely give the Bank of Canada some confidence to hold interest rates steady at its March meeting. This pause would let policymakers gauge whether current measures are doing enough to support growth in what remains a very uncertain environment.”

Headlines

• Canada’s headline inflation accelerated to 1.9% in January, in line with consensus (1.9%) on a year-over-year basis. Monthly seasonally adjusted prices grew 0.1%, the same as unadjusted prices.
• The HST holiday pulled prices down for affected components but was overshadowed by energy prices.
• The Bank of Canada’s core measures (Trim and Median) rose to at 2.7% year-over-year. Short-run core measures (3-month change annualized) cooled but are still running at 3%, indicating underlying price pressures. Muted price growth in some areas of the basket are moderating or returning to growth.

CPI components

• Shelter prices made little progress in January, holding at 4.4% annual growth. Rent and mortgage interest costs eased to 6% and 10% respectively.
• Food prices were one of the main drivers of lower inflation. The HST holiday pulled the category down 0.6% for the first time since 2017. Lower restaurant prices (-5%) helped keep food prices down, as grocery store prices grew 1.9% in January.
• Energy prices kept the overall CPI elevated with base-year effects impacting prices. Gasoline prices increased 9% and natural gas prices were up 5% – the first increase since April 2023.
• Services inflation slowed to 2.8% in January with health care and personal care driving the category higher. Travel services slowed from 8% to 6.6% in January.
• Goods inflation, which has had many months of muted price growth, rose nearly 1% as non-durables increased nearly 2% and durables slowing price declines (-0.4%) due to faster price growth for new vehicle purchases. Clothing and footwear prices declined 1.2% on an annual basis and toys were down nearly 7% as the HST holiday impacted those goods.

Provincial inflation

Inflation accelerated in six provinces, with Saskatchewan and Manitoba rising on higher energy prices. Prices slowed in British Columbia and New Brunswick. The reintroduction of the fuel tax in Manitoba and impacts from the reduction in other provinces last year are contributing to the regional increases.

Implications

• January CPI: Inflation came in above the Bank of Canada’s January forecast of 1.7% year-over-year. The share of the CPI basket growing at or below 2% fell to 58%, down from 64% in December.
• Federal GST/HST Holiday: Introduced on December 14, this policy affects 10% of the CPI basket, according to Statistics Canada. It was expected to lower prices by up to 1.1%, but the data looks like the full impact didn’t come to fruition. Without the tax relief, prices would’ve risen 2.7%, up from 2.3% in December. The holiday lasts until February 15, so will impact next month’s prices.
• Monetary Policy Outlook: Markets erased bets of a 25-basis-point rate cut at the Bank of Canada’s March 12 meeting. Despite our working assumption that rates should be lowered to neutral (around 2%) by Summer 2025, the Bank will likely pause rates at their next meeting to evaluate the effects of their monetary policy.

Charts and tables

Sources: Statistics Canada; Canadian Chamber of Commerce Business Data Lab