Canada’s inflation rate slows down faster than anticipated, entering the Bank of Canada’s target zone.

Inflation Rate Slows More Than Expected, Falling Within Bank of Canada’s Target Range

The latest data from Statistics Canada indicates that inflation rates have slowed down to 2.9 percent in January, marking the first time since June that it has fallen within the Bank of Canada’s target range of one to three percent.

A Sharper Decline Than Expected

This deceleration is sharper than the 3.3 percent reading expected by economists and the 3.2 percent mark forecast by the central bank itself. The decline in the pace of inflation was largely due to a year-over-year decline in gasoline prices, which Statistics Canada reported.

Core Measures of Inflation Also Fall

The Bank of Canada’s core measures of inflation, which strip out volatility in prices, also fell in January. CPI-trim and CPI-median clocked in below expectations at 3.4 percent and 3.3 percent year-over-year growth, respectively.

Discretionary Spending Slipping

CIBC economist Andrew Grantham noted that discretionary spending was slipping and the drop in demand finally appears to be affecting prices. Conference Board of Canada researcher Kiefer Van Mulligen also pointed out survey evidence from the Bank of Canada showing consumers have pared back their price growth expectations for many goods.

Lower Prices for Airfares Contribute to Headline Deceleration

Lower prices for airfares and travel tours also contributed to the headline deceleration. Prices for airfares fell 14.3 percent in January, compared with a 9.7 percent decline in December on a year-over-year basis.

Interest Rate Cut Expected Soon

With Tuesday’s reading being the last inflation report before the Bank of Canada’s next rate decision on March 6, markets are now pulling forward their bets on the timing of the first interest rate cut, putting almost even odds on the April meeting. RBC’s Xu said that the most likely path for inflation going forward is still lower with per-capita GDP and consumer spending continuing to decline.

The Path Forward

After Tuesday’s data, markets pulled forward their bets on the timing of the first interest rate cut, putting almost even odds on the April meeting, up from about 25 percent previously. Additional reporting by Bloomberg suggests that policy makers should not be in a rush to start cutting interest rates.

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