Canadian CPI ticks back up to 1.9% in January

Inflation continued to tick higher in January – despite the lingering effects of the GST tax holiday – as gas prices rose considerably for customers at the pump.

According to Statistics Canada, Canada’s Consumer Price Index (CPI) rose 1.9% last month, following an 1.8% reading in December. Stripping out higher energy prices – which increased 5.3% annually – would have resulted in a year-over-year number at 1.7%. On a monthly basis, the CPI rose 0.1% in January compared with a 0.4% decline in December.

Tax holiday hides full CPI growth

While within the Bank of Canada’s 2% target range, the true extent of the headline number has been masked by the two-month GST holiday, which ran between December 14 to February 15th. Implemented by the federal government to give Canadians price pressure relief, the tax break applied to a number of spending categories including alcoholic beverages, food at restaurants, and many children’s items. 

Overall, it impacted 10% of the consumer basket tracked by StatCan; excluding those tax changes would have resulted in inflation rising by 2.6% in January, a considerable jump from September’s 1.5% reading.

Mortgage interest costs, meanwhile, continued to make up about 30% of annual CPI growth, though they continue to moderate as interest rates lower, coming in at a year-over-year  increase of 10.2%. Rent costs, meanwhile, posted their first month-over-month decrease since 2023, dropping by 0.1% from December. While up 6.3% from 2024 levels, that’s down from 7.1% recorded last month.

BoC likely to take a pause on rates

That inflation rose even with the tax holiday still in place will be troubling for the Bank of Canada (BoC); the central bank is tasked with keeping the measure at a growth rate of 2%, and generally hikes its benchmark interest rate when the CPI rises above that threshold.

The “core” inflation measures that are also tracked closely by the central bank increased as well; both the CPI trim (which strips out high and low extremes in prices) and the CPI median (which measures the middle of the CPI basket) came in at 2.7%, up from 2.5 and 2.6% respectively from the previous month.

Economists say this latest inflation print will persuade the BoC to leave its trend setting Overnight Lending Rate unchanged in its next rate announcement on March 12. That’s a sharp turnaround from the near-unanimous calls for a cut, and even expectations of an emergency decrease, at the start of the month, following the initial threats of US 25% tariffs.

In a note following the CPI release, RBC economists Abbey Xu and Claire Fan write, “Overall, a middle-of-the-road inflation print after an upside surprise in December is less desirable than what we and the central bank would like to see. We think the BoC will want to wait for more data for hints on how underlying price pressures are evolving excluding impact from the tax holiday, and take a pause from cutting interest rates in their next meeting in March.” 

They add that rate cuts are likely to pick back up later this year as Canada’s economic backdrop will continue to weaken.

Meanwhile, Douglas Porter, BMO’s Chief Economist and Managing Director of Economics, writes that this report was in line with the lender’s expectation, but says the headline number will quickly rise in the coming months as the GST holiday effect fades, likely to the 2% to 2.5% range. That will match current trends in the core numbers which “have been a tad warm for comfort in recent months."

“We continue to lean to the view that the BoC will take a pause at their next decision (March 12), although developments on the tariff front may yet have a big say in that call—the possible 25% U.S. tariff on Canada and Mexico still looms for March 4,” he writes.

Also read:

• What Canada’s 2-month GST / HST tax break means for you
• December CPI drops to 1.8% due to tax holiday
• Bank of Canada cuts target interest rate by 0.25% in January 2025 announcement
• How could 25% US tariffs impact Canadian mortgage rates?
• How US tariffs on Canada could impact you
• Inflation and the Consumer Price Index in Canada