To kick off the new year, the national inflation* reading stayed near the Bank of Canada’s 2% inflation target again last month.

The Consumer Price Index (CPI) rose by 1.9% year-over-year (y/y), in line with expectations and a slight uptick from December’s 1.8%. An acceleration in energy prices was partly offset by the GST/HST holiday.

With inflation continuing to cooperate, we see the Bank of Canada more focused on downside growth risks amid trade turmoil. Our call is for the Bank to take its policy rate to 2.5% by June if inflation remains near target. If a trade war ensues (with U.S. broad-based tariffs and Canadian countertariffs), we see the policy rate falling to 2.0% by mid year.

As for the March 12 rate decision, it will depend on whether the tariffs proceed. If yes, we expect a rate cut. If not, the Bank may be inclined to take a brief pause.

Here are the national inflation details:

Gift wrapped - The GST/HST holiday break put downward pressure on a range of items. Year-over-year (y/y) prices for restaurant food dipped 5.1%, a record decline, while toy and game prices fell 6.8% and alcoholic beverages (from stores) eased 3.6%.

What gives, also takes - The tax holiday is over, which means that these temporary effects will evaporate starting in mid February. Expect to see an acceleration in month-over-month price increases in the next two reports. These tax-induced gyrations will be largely ignored for monetary policy‒the Bank of Canada has said it will see through the transitory effects.

Energized - Higher energy costs were the main culprit for the slight uptick in the headline inflation rate, driven by an acceleration in gasoline and natural gas costs.

Stickier core  - Core measures of inflation, which attempt to capture underlying trends, remain more elevated than the headline. The two key indicators—median and trim—both rose by 2.7% y/y.  However, the three-month measures** calmed down a bit to the low 3s.

Seeking shelter - Shelter is still a major inflation culprit, but its effect is diminishing. In January, shelter costs rose 4.5% y/y—the lowest since June 2021. Mortgage interest costs were up 10.2% y/y, down from the peak of 31% in the summer of 2023. This measure is heavily influenced by monetary policy, and will continue to ease as the Bank cuts. Excluding mortgage interest costs, consumer prices rose 1.5% y/y.

Food inflation holds - Grocery prices rose by 1.9% y/y for the second straight month. While food is not adding as much these days to headline inflation, consumers face much higher prices than before. Grocery prices are up 25% since January 2021.

Alberta inflation rate steady

In Alberta, the annual inflation rate remained unchanged at 2.5% and continued to exceed the national average amid faster growth in energy and shelter costs. In addition, the tax holiday had a smaller dampening effect in Alberta given that only the GST applies in the province (other provinces like Ontario also had a HST break).

One of the main reasons for higher inflation in Alberta last year was rental accommodation, a function of rapid population growth and a tight housing market.   While rents  (7.2% y/y last month) continued to outpace the national average, rental inflation has moderated significantly since last spring and has moved more in line with national trends.

Alberta gasoline prices (+18.9% y/y) continued to outpace the national average. We expect gasoline inflation readings to move more in line with national trends, as temporary effects of the fuel tax pause come off. Recall that the province paused the fuel tax in 2023 and much of 2022. This lowered annual inflation in 2022-2023, but raised it when the tax was reinstated 2024. The tax was partially reinstated in January 2024, and then fully reinstated in April 2024. As such, the tax measure will no longer affect the year-over-year readings starting this April.

Our base case forecast for 2025 is for Alberta’s inflation rate to moderate to 2.2% following a 2.9% increase in 2024, though there is a risk of prices escalating under a full trade war scenario

*The inflation rate is the year-over-year percent change in the unadjusted monthly Consumer Price Index.

**Month-over-month changes in the 3-month moving average, annualized.

Answer to the previous trivia question: Canada, the U.S., Finland and Sweden are the four countries participating in the NHL’s 4 Nations Face-Off Tournament.

Today’s trivia question: When was the last time Canada’s inflation rate was negative?