(Bloomberg) -- Canadian consumer price pressures eased in January, leaving the Bank of Canada some room to hold interest rates at current levels next month even after a blockbuster jobs report.
The deceleration in inflation suggests policymakers have raised rates enough to restrain price gains, giving support to their decision to pause an aggressive rate-hiking cycle, at least in the near term.
The consumer price index rose 5.9% from a year ago, Statistics Canada reported Tuesday in Ottawa, a smaller rise than the 6.1% increase expected in a Bloomberg survey of economists and down from 6.3% in December. On a monthly basis, the index rose 0.5% in January, versus expectations of 0.7%.
Bonds rallied after the release, pushing the benchmark two-year yield as low as 4.149% before paring gains. The Canadian dollar dropped as low as C$1.3529 per US dollar.
Two key yearly measures tracked closely by the central bank — the so-called trim and median core rates — edged lower, averaging 5.05% from an upwardly revised 5.25% a month earlier. Economists were also expecting a reading of 5.05%.
“The Canadian data is showing clearly — surprisingly — a more disinflationary trend at the beginning of this year, and for sure that will comfort the Bank of Canada going into the March decision,” Dominique Lapointe, director of macro strategy at Manulife Investment Management, said on BNN Bloomberg Television.
Inflation in services, which is one of the key figures policymakers are watching, eased to 5.3%, from 5.6% in December.
The data suggest that 425 basis points of interest-rate hikes in 11 months are starting to temper price gains, though inflation remains well above the Bank of Canada’s 2% target. The figures also support views that inflation will continue to ease this year, allowing the central bank to hold rates steady at 4.5% at its next decision on March 8.
Governor Tiff Macklem declared a conditional pause last month, saying the central bank would move to the sidelines and assess the impact of its rapid tightening on the economy. Macklem said he expects growth in output to be near zero in the first three quarters of this year, allowing the economy to move from excess demand to modest excess supply and relieving price pressures.
He forecasts the headline rate of price pressures to fall to 3% by midyear and return to the 2% target in 2024.
The inflation report came less than two weeks after jobs data showed employment grew by 150,000 positions, a 10-fold surge past expectations, while the jobless rate held steady at 5%. It was the fifth straight month of increases for a labor market that continues to defy all predictions of a coming slowdown this year.
Still, the central bank is likely to refrain from hiking if price pressures continue to ease. Policymakers said the bar for raising rates is now much higher and that they would need to see an “accumulation of evidence” that price pressures and the economy aren’t cooling fast enough to consider another hike.
Overnight swaps traders pared bets for near-term tightening from the Bank of Canada, with odds of an increase to borrowing costs falling for the March and April meetings. But markets see higher odds the central bank will be forced to deliver another rate hike later this year.
While headline inflation in January grew at a slower pace in part due to a base-year effect, prices for cellular services and passenger cars contributed to the deceleration. Higher prices for gasoline, meat and interest costs are among the biggest contributors to price gains last month.
In January, gasoline prices rose 2.9% year-over-year, food prices were up 10.4%, and the mortgage interest cost index jumped 21.2% — the largest increase since September 1982. Rent gained 5.8%.
“Today’s data added to evidence that inflation is coming under control, even as growth in the economy continues to hold up better than expected in the face of higher interest rates, creating a confusing picture for the Bank of Canada,” Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a note.
Data also show that Canadian consumers have kept on spending as a strong labor market counteracts some of the effects of higher interest rates.
An advance estimate suggested receipts for retailers jumped 0.7% in January, following a 0.5% increase in December, which was led by higher sales of motor vehicles and parts, the statistics agency said in another release on Tuesday.
The growth in December adds to a flat reading in November and a 1.3% gain in October, ending last year with relatively strong retail sales.
--With assistance from Erik Hertzberg.
(Updates with more details throughout.)
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