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Canada's inflation excluding shelter hit target in January

REAL ECONOMY BLOG | February 20, 2024

Authored by RSM Canada

Canada’s consumer price index report for January brought good news for consumers, businesses and the Bank of Canada alike. CPI dropped to 2.9%, led by lower year-over-year figures in gasoline prices. On a monthly basis, prices stayed flat.

CPI dropped to 2.9%, led by lower year-over-year figures in gasoline prices.

Consumers breathed a sigh of relief as grocery prices grew at 3.4%, the slowest pace since 2021. All core inflation measures also showed moderation.

The big hurdle now lies in housing, and it’s not a puzzle that monetary policy can solve.

Excluding shelter, inflation is down to 1.5%. Excluding mortgage interest payments, inflation reached 2.0%, showing that monetary policy has basically done its job.

Some of the easing could be attributed to base-year effects, as January 2023 saw big jumps in food and energy.

Canada CPI

No matter what the Bank of Canada does, housing costs will continue to grow because of a shortage of supply. If they hold, there will be high inflation in rents and mortgage interest payments. When they cut, prospective buyers on the sideline will jump in, pushing prices up. It’s a lose-lose situation.

It becomes a question of how much housing will factor into the Bank of Canada’s decisions.

A first rate cut in June remains the most likely scenario as the central bank would want to see sustained evidence of easing inflation.

Furthermore, the Bank of Canada cannot ignore housing entirely because it makes up a substantial portion of headline inflation and because many households spend a third or more of their income on housing.

But the solution for the housing shortage lies beyond monetary policy and would require all levels of government and businesses to address it.

But if inflation excluding housing continues to show progress, we suggest that the Bank of Canada consider April as the start date to give the economy room to recover.

The data

Gasoline prices fell by 4.0%, declining for the fifth consecutive month.

Inflation entirely comes from services, especially shelter now, as shelter inflation reached 4.2% while goods inflation fell to 1.3%. But services inflation could ease in the upcoming months too.

The slowdown in consumer spending, even on services, is in full view. Since January is a time for businesses to set prices, the lukewarm increases across the board show that consumer demand is no longer there, and businesses are not able to raise prices by much anymore.

In few areas is this as obvious as in airfares, whose prices fell by 14.3% on a year-over-year basis. Weak demand for services no longer warrants price hikes.

Consumers might be pulling back on discretionary spending as they are hit by higher housing costs and are nervous about potential layoffs.

The takeaway

Given consumers’ lackluster spending this year, inflation is expected to continue to ease. The Bank of Canada will need to decide how much to factor in housing inflation when making its decision about rate cuts.


Contact your trusted Stark & Marsh Advisor or an office close to you.

This article was written by Tu Nguyen and originally appeared on 2024-02-20 RSM Canada, and is available online at https://realeconomy.rsmus.com/canadas-inflation-excluding-shelter-hit-target-in-january/.

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