Canadian Analysis

The Bottom Line

The tick lower in Canada’s headline year-over-year rate to 2.3% in January (2.4% in December) was despite tax-related distortions that biased the measure higher with with after-tax prices this year measured against tax exempt prices a year ago during the temporary 2024/2025 GST/HST tax holiday.

Excluding the impact of indirect taxes, year-over-year price growth slowed to 2.1%. The Bank of Canada’s core trim and median measures – designed to provide a better gauge of underlying price growth and, critically, exclude changes in indirect taxes – continued to edge lower, dropping to 2.5% on average on a year-over-year basis (2.6% in December) on a smaller than expected 0.1% month-over-month change.  

Lower inflation reading leave the BoC with more flexibility to respond to weakening economic conditions with lower interest rates if necessary, although we do not expect as a base-case that additional reductions will be needed. Pockets of price growth are still high (grocery prices in particular.) Year-over-year growth in the trim and median measures have still been above the 2% inflation target for almost five years. And there have been signs that (per worker) labour markets have started to improve at current levels of interest rates. 

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The January details:

• Headline CPI growth slowed to 2.3% in January from 2.4% in December – led by lower energy prices but also relatively broadly based slowing across underlying price components. 

• The slowing in year-over-year price growth was despite tax distortions that are exaggerating year-over-year increases. The temporary GST/HST tax holiday a year ago means after-tax prices in January 2026 are being compared to pre-tax prices a year earlier.

• The removal of the consumer carbon tax in April is having the opposite effect, lowering observed price growth in energy products. 

• Excluding indirect taxes price growth slowed to 2.1% year-over-year from 2.5% in December. 

• The Bank of Canada’s core trim and median measures both are designed to exclude the impact of indirect taxes and posted a second consecutive very small month-over-month (seasonally adjusted) gain at 0.1% in January. Both measures remained above the BoC’s 2% inflation target at 2.4% and 2.5%, respectively, but averaged just a 1.2% annualized rate over the last three months.  

• Much of the slowing in core measures appears to have come from easing shelter price growth. Home rent price growth slowed to 4.3% and mortgage interest cost growth continued to moderate (1.2% year-over-year versus 1.7% in December) as a wave of mortgage renewals at higher interest rates in 2023 and 2024 continues to ease. 

• Trim services ex-shelter prices (a measure the BoC has used in the past as a better gauge of domestically generated price growth in Canada) rose 0.2% month-over-month and 3.1% year-over- year (down slightly from 3.2% in December) 

• Food price growth remains very high – GST/HST tax holiday distortions pushed the price of restaurant meals up to 12.2% from a year ago.  Prices at grocery stores also continued to rise sharply, but with year-over-year growth easing to 4.8% after hitting 5.0% in December. 

• Energy prices fell 10.9% year-over-year, led by a plunge in the price of gasoline, about half of which is due to the removal of the consumer carbon tax in April 2025. 

• Still the share of the overall consumer price basket seeing unusually high price growth continued to edge lower – by our count, about 23% of the CPI basket was growing at above a 5% rate over the last three months, down from 28% in December and 30% in November.

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About the author

Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.

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