Insights & Resources

Tariffs threaten Canada’s inflation rate.

The latest data from Statistics Canada revealed that its consumer price index rose 0.1% (seasonally adjusted) in January. As can be seen in the accompanying graph, the CPI was up 1.9% on a year-over-year basis. This figure is marginally higher than the 1.8% pace posted in December and was the thirteenth consecutive monthly reading inside the Bank of Canada’s 1%–3% target band. The three Bank of Canada core inflation measures reported generally higher results in January. They ranged from 2.2% to 2.7%. CPI common, which the central bank says is most closely correlated with the output gap, stood at 2.2% in this report. In line with the
monthly advance, four of the eight main CPI subgroups moved higher during December. Clothing recorded the largest (0.9%) monthly advance. Meanwhile, alcoholic beverages, tobacco products and recreational cannabis saw the largest of the four declines (-1.4%) amid the GST/HST “holiday”. The reversal of these tax incentives will see prices rise commensurately as they come off. More importantly, any countervailing tariffs on U.S. goods will also heavily influence consumer prices going forward. At present, the Canadian dollar is under heavy pressure in international trading. Given the recent bout of food price inflation, any tariffs on imported food that come into force while the currency is this weak will magnify the price impact. The market will, once again, weigh the chances of another rate cut by the Bank of Canada at its next policy announcement, on March 12, 2025, as this will put additional downward pressure on the loonie.

U.S. labour market remains firm

The U.S. Bureau of Labor Statistics announced that the unemployment rate edged lower to 4.0% in January from 4.1% in December. At the same time, non-farm payroll gains were reported as 143,000 during the month, adding to the revised 306,000 gain posted for November (originally reported as 256,000). This extended the string of consecutive monthly payroll gains to 49.

Additionally, average hourly earnings climbed 0.5% in January to stand with a year-over-year advance of 4.1%, above headline inflation. The consumer price index recorded a 3.0% annual advance in January, the largest 12-month increase since June 2024.

The clear resilience of the U.S. job market coupled with the recent rise in inflationary pressure will prompt further market debate on the probability that the Fed will remain “on hold” at their next policy meeting, scheduled for March 18 and 19.

Longer View

The experiments of spending now and worrying later have proven to be too costly. Additionally, pursuing “green” initiatives at any price has contributed to deteriorating economic conditions in Canada. Both Americans and Canadians are calling for new governments that will prioritize “common sense” policies. It is expected that the interest rate gap between Canada and the U.S. will remain wide for some time, as the Bank of Canada will need to cut rates more quickly to improve competitiveness. Bond yields indicate a 1.4% gap over the next 10 years, which will likely result in a weaker Canadian dollar.

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