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Canada’s annual inflation rate dipped below 6 per cent for the first time since early 2022, helped by lower prices for cellphone service and vehicles, even as food costs continued to soar.

The Consumer Price Index rose 5.9 per cent in January from a year earlier, down from a 6.3-per-cent pace in December, Statistics Canada said Tuesday in a report. Financial analysts were expecting an inflation rate of 6.1 per cent. It was the lowest reading since February, 2022.

On a month-over-month basis, consumer prices rose 0.5 per cent. But prices jumped 0.9 per cent in January, 2022. This is why the most recent year-over-year inflation reading is weaker. Prices were increasing at such a rapid clip in the first month of 2022 that this January’s increase looks modest by comparison. This is known as a base-year effect.

In response to the report, several analysts said the Bank of Canada is likely to hold its policy interest rate at 4.5 per cent on March 8, when its next rate decision will be announced.

At its last decision, in January, the central bank announced a “conditional pause” on further rate hikes, following eight consecutive increases from a historic low of 0.25 per cent. Bank officials have said they could still raise rates if there is an “accumulation of evidence” that inflation is not easing as expected and the economy is running too hot. Higher interest rates increase the cost of borrowing, which tends to weaken economic activity and lower inflation.

There were encouraging signs in Tuesday’s report. Supply-chain troubles are fading, leading to discounts on furniture and other items. Inflation in the prices of services decelerated slightly. And the short-term trend for consumer price growth is slowing quickly.

How money markets and economists are reacting to today’s Canadian inflation report

“We are seeing more green shoots in the inflation data in Canada,” said Claire Fan, an economist at Royal Bank of Canada. This situation is “far from what a lot of us are accustomed to, which is a sub-2-per-cent rate of inflation over the decade before the pandemic. But the trend of where this is going is still positive.”

The Bank of Canada projects that annual CPI growth will ease to around 3 per cent by the middle of the year and return to the central bank’s target inflation rate, which is 2 per cent, by the end of 2024.

Two of the bank’s preferred measures of core inflation fell to an average annual rate of 5.05 per cent in January, down from 5.25 per cent in December. The three-month change in those prices, expressed at an annualized rate, was about 3.5 per cent. Many analysts are looking at the short-term trend in inflation for signs of deceleration.

As the CPI began to accelerate in 2021, a key culprit was supply-chain disruptions that led to product shortages and substantially higher shipping costs. Now, those issues have largely dissipated.

Vehicle prices fell 0.1 per cent in January, compared with the previous month. That drove the annual rate of price growth for cars to 6.2 per cent in January, from 7.2 per cent in December. Auto dealers are rebuilding their inventories after a semi-conductor shortage hammered production.

Cellular service prices fell 6.6 per cent on a monthly basis. Statscan noted that some Boxing Day sales remained available into January. Meanwhile, air travel costs fell 20 per cent in a month. Such declines are common after the holidays.

There are, however, sticky aspects of inflation. Food prices – both at grocery stores and restaurants – rose at an annual pace of 10.4 per cent in January, up from 10.1 per cent in December.

Meat prices saw their largest monthly gains since 2004. In particular, chicken prices jumped 9 per cent in a single month, which Statscan attributed to “stronger seasonal demand as well as ongoing supply constraints, elevated input costs and issues related to avian influenza.”

Gasoline prices rose 4.7 per cent in January, following several months of decline that had contributed heavily to the recent easing of inflation.

Over all, shelter costs rose 6.6 per cent on an annual basis, down from 7 per cent in December.

Within that category, mortgage interest costs have jumped by 21.2 per cent over the past year, as borrowing rates have risen. Many Canadians have yet to renew their mortgages at higher rates. Doing so could be a source of financial pain for many households later this year.

In a separate report on Tuesday, Statscan said that retail sales rose 0.5 per cent in December on a monthly basis, and by another 0.7 per cent in January, according to a preliminary estimate.

“Alongside some healthy readings for retail sales in December/January, the deceleration in CPI adds to evidence that the Bank of Canada doesn’t need to engineer a recession to get inflation under control,” Andrew Grantham, a senior economist at CIBC Capital Markets, said in a note.

CIBC expects the annual rate of inflation to fade below 3 per cent by May, but remain sticky through the end of the year, owing to higher mortgage rates and food prices.

“That supports our call for no further interest rate hikes, but also no cuts until early 2024,” Mr. Grantham said.

With a report from Mark Rendell

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