Gasoline Prices Could Hurt Slowing Inflation

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Gasoline Prices Could Hurt Slowing Inflation

Rising fuel prices may have hampered slowing inflation.

Canada's annual inflation has been slowing since the summer, but economists predict that higher fuel prices in January may have hindered this trend.

Observers have been encouraged by recent monthly trends, which showed prices rising at a slower pace.

However, TD Bank expects an acceleration in price growth between December and January.

January […] looks set to be a mild setback, said TD's chief economics officer, James Orlando, also noting that a one-month rise does not mean that February will not return to the downward trend.

Statistics Canada is due to release its consumer price index for January on Tuesday. The report will include headline inflation for the past month, which compares prices to the same period last year.

Canada's headline annual inflation fell from its peak of 8.1% in June to 6.3% in December as gasoline prices fell, supply chain issues have eased and interest rates have weighed on spending.

As TD anticipates faster growth prices between December and January, it expects annual inflation for January to be 6.2%. CIBC expects a slight increase to 6.4%.

Although inflation has slowed in recent months, progress has been less on food prices. In December, grocery store prices were up 11% year-on-year.

Orlando says food inflation may have eased last month due to lower diesel prices, which affect transportation costs.

It's probably not slowing down as fast as most Canadians would like, but [the food] is one of the slowest moving elements in inflation, Orlando said.

As for longer-term forecasts, most economists remain confident that inflation will decline significantly this year.

Part of that is due to the way inflation is calculated. Since most of the acceleration in price growth occurred last spring and early summer, the annual rate is expected to drop significantly over the next few months.

When the large price increases we saw last year are no longer factored in later this spring, it will lead to a significant drop in headline inflation, Karyne Charbonneau pointed out, Managing Director of Economic Affairs at CIBC.

The Bank of Canada expects annual inflation to fall to around 3% by mid-2023 and return to its target of 2 % next year.

Tiff Macklem, Governor of the Bank of Canada

Last month, the central bank raised its policy rate for the eighth straight time since March 2022, taking it from near zero to 4.5%. This is its highest level since 2007. While announcing the new hike, the central bank clarified that it would take a conditional break to assess the effects of the interest rate hike on the economy. x27;economy.

Economists note that interest rate hikes can take up to two years to fully affect the economy.< /p>

However, if inflation does not slow as expected and the economy remains warm, the central bank has made it clear that it is ready to resort to further rate hikes.

Mr. Orlando said a slight acceleration in prices for a month was unlikely to prompt the Bank of Canada to raise interest rates, noting that the bar for further rate hikes was now higher. .

He added that the Bank of Canada knows it has raised rates to a level that should slow the economy and lower inflation. .

If there was anything the central bank would be more concerned about right now, it would be the January jobs report, which came in particularly strong, Orlando added.

Statistics Canada reported earlier this month that the economy created a net total of 150,000 jobs last month. With more Canadians looking for or employed, the unemployment rate was 5%, hovering around record lows.

On Thursday, the governor of Bank of Canada Tiff Macklem said the economy was still in excess demand and the labor market remained too tight.

For inflation to back to 2%, labor market tightness needs to ease [and] wage growth needs to moderate, says Macklem.

If things don't go As expected, the Governor warned that the Bank of Canada was [ready] to raise the policy rate further.

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