Canada’s Inflation Increases to 1.9% in January, Increasing Odds of a Rate Cut

Canada’s inflation rate went in the wrong direction in January, with the Consumer Price Index ticking up to 1.9%. In December, Canada’s inflation rate was 1.8%. The increase was a little unexpected in light of the national GST holiday that ran from December 14, 2024 to February 15, 2025.

It could have been a lot worse. The temporary GST break skewered the inflation data. If you remove the impact of the GST holiday, Canada’s consumer price index was up 2.7% in January.

According to Statistics Canada, the bigger-than-expected acceleration was a result of energy prices, especially for gasoline and natural gas, which were responsible for most of the gains. On a monthly basis, gasoline prices were up 4% and natural gas prices climbed 6%. Other items that were more expensive on a monthly basis include fresh fruit (+4.8%) and telephone services (+6.8%).

On an annual basis, energy prices were up 5.3%, with prices at the pump jumping 8.6% and natural gas prices up 4.8%. Other contributors to Canada’s rising inflation rate include mortgage interest costs (+10.2%), rent (6.3%), and property taxes and other special charges (6.0%).

It wasn’t all bad news; some items were less expensive on a monthly basis, notably, air transportation costs were down 22.6%, while traveller accommodations were down 12.3%, food purchases from restaurants were down 3.1%, and alcoholic beverages served in licensed establishments were down 2.2%.

Will Higher Inflation Lead to Lower Interest Rates?

Core inflation, the measures the Bank of Canada looks at when deciding on the direction of its monetary policies, were all up as well. CPI-common, a broad measure of inflation that tracks common price changes across various categories in the CPI index basket, rose 2.2% on an annual basis in January compared to 2.0% in December.

CPI-medium, a more complex measure of core inflation that looks at the price change at the 50th percentile, rose 2.7% on an annual basis in January compared to 2.6% in December. CPI-trim meanwhile, a measure of inflation that excludes the most extreme price changes, climbed 2.7% in January compared to 2.5% in December.

The unexpected increase in inflation could force the Bank of Canada to lower its interest rate when it meets next on March 12. The Bank of Canada last lowered its overnight lending rate in January to three percent.

In addition to higher inflation, Canada is dealing with tariff threats from U.S. President Donald Trump. On top of that, the Bank of Canada’s policy rate is currently three percent, which is at the upper end of its neutral range. It shouldn’t technically stop stimulating economic growth by lowering interest rates until it hits two percent.

While interest rates are down from five percent last summer, it’s still onerously high at three percent. More than half of Canadian mortgages (1.2 million) are up for renewal in 2025 and another 980,000 in 2026.

Most of those mortgages were locked in when interest rates were near record lows during the 2020/2021 health crisis. Additional interest rate cuts from the Bank of Canada would help lower the expected big increases in mortgage payments, reduce delinquencies, and be less of a drag on the Canadian economy.

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