A welcome consumer price report in Canada to start the year, especially compared to the unpleasant inflation surprise in the U.S. last week.

Canada’s annual inflation rate dropped from 3.4% to 2.9% last month, back within the Bank of Canada’s 1-3% inflation control range—and well below the consensus forecast of 3.3%.

Lower gasoline prices were a major contributor to lower inflation, falling 4% year-over-year (y/y). But gasoline wasn’t the entire story: inflation eased to 3.2%, down 0.3 points, excluding gasoline.

A big slowdown came from grocery prices, which eased to 3.4% y/y, the smallest annual increase since August 2021. However, much of this was related to ‘base-period’ effects. Food prices still rose last month, but an abnormally big monthly jump in January 2023 reduced the year-over-year rate. Lower airfares also contributed to the softer headline reading.

Shelter has replaced food as the new trouble area, and prices remain elevated. Rents rose 7.9% y/y, a minor pickup from December. Mortgage interest costs, which are directly impacted by Bank of Canada policy, rose 27% y/y. That puts annual inflation excluding mortgage costs at 2%. Fortunately, mortgage interest costs will continue to dissipate as an inflation driver over time as the Bank looks to lower rates later this year.

The Bank of Canada will look past monthly swings caused by volatility in the price components. It’s closely tracking core, or underlying, inflation. The two most cited core measures—CPI-trim and CPI-median—eased on a year over year basis to 3.4% and 3.3%, respectively. Removing base-year effects, the growth in the three-month moving average also moved lower.

There is no question this is a welcome report for the Bank of Canada with core and headline inflation showing improvements. But the Bank is in a cautious stance and will look for more evidence that this pattern continues. A hold next month is a pretty safe bet. We still think June is the earliest the Bank will cut. A few lingering concerns will keep the Bank patient: elevated inflation expectations, persistent wage growth and core inflation still above 3%.

Closer to home, Alberta started the year with a 3.4% y/y inflation rate in January, rising above the national rate for the first time since August 2023 due to higher energy costs (+7.8% y/y vs. -2.7% nationally). Electricity prices more than doubled from the same time last year, as January 2023 prices were lowered by rebates, which are no longer in effect. Compared to December, electricity prices were down slightly (-2.7%) and 30% below their August 2023 peak. Gasoline prices fell 3.3% y/y, just below the 4.0% national decline, despite the partial reinstatement of fuel tax in January. Rents remain a big driver, rising 10.9% y/y. Excluding food and energy prices, consumer prices rose 2.8% y/y, below the 3.1% national increase.

Answer to the previous trivia question: At almost 39 million residents in 2023, California is the most populous state in the U.S.

Today’s trivia question: On February 20, 1962, who became the first American to circle the Earth in orbit?