January CPI report points to mid-year rate cuts: RBC

The latest CPI report adds more fuel to the notion that rate cuts are coming, say economists at RBC.

On February 20, Statistics Canada released its Consumer Price Index for January that showed the inflation rate at 2.9 per cent.

The agency said the largest contributor to deceleration was gasoline prices, which fell four per cent. Grocery prices continued to rise, but at a slower pace (+3.4%). The price of airfares was way down (-14.3%), while cell services were way up (+16.4%).

RBC economists Nathan Janzen and Abbey Xu say housing remains a big problem that needs to be untangled.

“The first CPI report in 2024 came in softer than expected with the breadth of inflation still showing signs of gradual easing, but also still wider than would be consistent with the Bank of Canada’s 2% inflation target,” the pair wrote. “Shelter inflation will remain sticky as higher interest rates feed through to mortgage interest costs with a lag and undersupply of housing continues to boost rent prices. The most likely path for inflation going forward is still lower with per-capita GDP and consumer spending continuing to decline. But a strong start to 2024 for labour markets gives the BoC more leeway to wait for firmer signs that inflation is getting back under control before pivoting to interest rate cuts. As of now, our base case assumes the BoC starts to lower interest rates around mid-year.”