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CMHC annual report

A dive into the latest inflation results…too soon to celebrate?

On the surface, the Consumer Price Index figures for January seem to confirm that inflation has finally been defeated. But soaring food prices and mortgage interest costs are continuing to take a bite out of household finances.

The annual rate of growth for the Consumer Price Index came in at 5.9%—the first time it has been under 6% since last February—and core measures of inflation are continuing to ease.

But observers point to persistent price pressures on several fronts, driven largely by food prices and high mortgage rates, that will need to be monitored in the months ahead.

Mortgage costs up, while shelter prices decline

Mortgage interest costs continued to rise given the current high-rate environment. The mortgage interest cost index was up 21.2% year-over-year, up from a pace of 18% in December. This was the largest increase since September 1982, Statistics Canada noted.

However, overall shelter prices rose at a slower pace in January, at an annual rate of 6.6% compared to 7% in December.

This was thanks to slower growth in homeowners’ replacement cost (+4.3%), which is related to the cost of new homes, and other owned accommodation expenses (+1.1%), which includes real estate commissions.

Why the release isn’t as dovish as at first glance

Markets reacted to evidence of weaker inflation, namely a softer-than-expected month-over-month CPI growth rate, as well as decelerating year-over-year gauges.

But Scotiabank economist Derek Holt explained in a research note why he believes the January inflation report is less dovish than some think.

“First off, ignore year-over-year readings as they offer little, if anything useful, given how influenced they are by year-ago base effects. For instance, [one] year ago saw Russia prepare to invade Ukraine and then do so, which drove multiple commodity prices higher,” he wrote.

“Secondly, trimmed mean and weighted median CPI measures of core inflation held firm at 3.7% m/m SAAR [seasonally adjusted annual rate] and 3.6% m/m SAAR respectively in January, thereby matching the December readings,” he added. “They are faster readings than in November when they both dipped toward 3%, but not by much and they are still cooler than early last year when the rates were running at double that and more.”

The bottom line is that these rates of core inflation at the margin are “cooler, but not cool,” Holt underlined.

Others, like Marc Desormeaux, Principal Economist at Desjardins, pointed out that while inflation indicators are moving in the right direction, with January’s reading being “one of the most optimistic since the start of our current inflationary predicament,” inflation is still “a country mile away from the 2% target.”

“We’re encouraged by the continued easing of multiple measures of core inflation, although it’s far too early to declare victory,” he noted.

What it means for the next Bank of Canada decision

The Bank of Canada’s next rate decision on March 8 will take into consideration the latest inflation figures, along with employment figures released last week.

“The Bank of Canada has now received two very different signals from the month of January,” Desormeaux noted.

He said that on the one hand, robust employment suggests “more work may be needed” by the Bank of Canada. On the other hand, the January inflation data, along with signs of easing wage gains, imply the “painful medicine of sharply higher interest rates is having its desired impact.”

“The Bank has stressed that to ditch the current plans to pause rate hikes, it needs an ‘accumulation of evidence’ that inflation isn’t cooperating,” he added. “[Yesterday]’s print suggests it just might be able to avoid any further rate increases.”

But as Bank of Canada Governor Tiff Macklem confirmed in testimony to parliament last week, the Bank stands ready to abandon a rate-hike pause should inflation prove sticky and fail to return to the 2% target.

“That process of normalization is one of the key things we’re watching to evaluate whether we raised interest rates enough to get inflation back down to target,” Macklem testified.

“And if we don’t see it continue to normalize, we will need to do more.”