High gas prices may have curbed downward inflation trend in January: economists

Canada’s annual inflation rate has been slowing since the summer, but economists are predicting that higher fuel prices in January may have hindered that trend.

Economists have been encouraged by recent month-to-month trends, which have shown prices have been rising at a slower pace.

However, TD is forecasting price growth accelerated between December and January.

“January is … looking like it’s going to be a little bit of a setback,” said TD director of economics James Orlando, also noting that a one-month uptick “doesn’t mean that February won’t go back down to trend.”

Statistics Canada is expected to release its consumer price index for January on Tuesday. The report will include last month’s headline inflation rate, which compares prices to the same time last year.

Canada’s annual headline inflation rate has fallen from its peak of 8.1% seen in June to 6.3% in December as gas prices have fallen, supply chain woes ease, and interest rates weigh on spending.

While TD is forecasting price growth accelerated between December and January, it is anticipating the annual inflation rate for January to come in at 6.2%. CIBC is forecasting a slight increase to 6.4%.

Although inflation has eased in recent months, less progress has been made when it comes to food prices. In December, grocery prices were 11% higher than a year ago.

Orlando said food inflation may have eased last month because of falling diesel prices, which affects transportation costs.

“It’s probably not coming down as fast as most Canadians want but (food) has been one of the real slow moving pieces of inflation,” Orlando said.

Looking ahead, most economists remain confident that inflation will fall significantly this year.

That’s in part due to how inflation is calculated. Given most of the acceleration in price growth happened last spring and early summer, the annual rate is expected to fall significantly in the coming months.

“When the big price increases that we saw last year fall out of the calculation later this spring, it will lead the overall number to fall quite a bit,” said Karyne Charbonneau, CIBC’s executive director of economics.

The Bank of Canada is forecasting the annual inflation rate to fall to about 3% in mid-2023 and back to its 2% target next year.

Last month, the Bank of Canada hiked its key interest rate for the eighth consecutive time since March 2022, bringing it from near zero to 4.5%. That’s the highest it’s been since 2007. At the time, the central bank said it would take a “conditional” pause to assess the effects of higher interest rates on the economy.

Economists note interest rate hikes can take up to two years to fully work their way through the economy.

However, if inflation doesn’t come down as expected and the economy stays hot, the central bank has made it clear it is ready to jump back in and raise rates further.

Orlando said a slight acceleration in prices during one month won’t sway the Bank of Canada to raise interest rates, noting the bar for further rate hikes is now higher.

He said the Bank of Canada knows it’s “raised rates to a level that should slow the economy down and bring inflation down.”

What should be more concerning to the central bank right now is January’s strong jobs report, Orlando said.

Statistics Canada reported earlier this month that the economy added 150,000 jobs last month. With more Canadians looking for or having work, the unemployment rate was five per cent, hovering around record-lows.

On Thursday, Macklem said the economy is still in excess demand and the labour market is too tight.

For inflation to get back to two per cent, Macklem said “the tightness in the labour market needs to ease and wage growth needs to moderate.”

If things don’t go as planned, the governor said the Bank of Canada is “fully prepared to increase interest rates further.”