As the Bank of Canada (BoC) deliberates on when to cut interest rates, the first reading of Canada's inflation for 2024 is expected to be released next Tuesday, potentially showing a slight decrease due to falling energy prices and slowing food price growth.
A recent report from the RBC Economic Analysis department on Canada's January inflation expectations predicts that, due to the decline in energy prices and the slowdown in food price growth, the Consumer Price Index (CPI) annual increase for January 2024 will drop from 3.4% in December to 3.2%. Although this change is modest, it suggests that inflationary pressures may be gradually but steadily returning to the Bank of Canada's target of 2%.
Key analysis points include:
Impact of Energy and Food Prices on Inflation: The report emphasizes that fluctuations in energy prices significantly affect the overall inflation rate, although this part is driven by market factors and is difficult for the Bank of Canada to control directly through monetary policy. Moreover, the growth in food prices is expected to slow down, which should improve compared to the same period last year.
Price Growth Excluding Volatile Components: After excluding the volatile food and energy prices, the core inflation rate is expected to remain at an annual level of 3.4%. This reflects the growth trends of other consumer goods and services prices beyond those most susceptible to market fluctuations.
Impact of Mortgage Interest Costs: The report points out that higher mortgage interest costs are a major factor driving price growth, a direct consequence of the Bank of Canada's previous interest rate hikes. Excluding this component, the actual price growth would have returned to within the central bank's target range.
Changes in the CPI Basket: The share of the CPI basket experiencing unusually high inflation is declining, indicating that inflation is becoming more balanced and no longer concentrated in just a few areas.
Labor Market and Consumer Demand: Despite stronger-than-expected labor market data in January, suggesting that demand remains strong, signs of softening have been shown on a per capita basis for consumer demand. This is reflected in the retail sales data, which is expected to show relatively stable growth.
In summary, although there are signs of slowing inflation, RBC Economic Analysis emphasizes that the Bank of Canada may need to continue maintaining policy flexibility to address potential future economic and inflationary pressures. Furthermore, the report suggests that given the strong performance of the labor market and the recovery of the real estate market, the central bank might be more cautious when considering rate cuts.
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