• Canadian core inflation suddenly decelerated
  • It’s just one month on a hot trend...
  • ...so expect the BoC to take it in stride while markets over-react
  • Time may tell if El Niño was a factor
  • Canadian CPI, m/m NSA // y/y, January:
  • Actual: 0.0 / 2.9
  • Scotia: 0.6 / 3.5
  • Consensus: 0.4 / 3.3
  • Prior: -0.3 / 3.4
  • Core inflation, m/m SAAR // y/y, January:
  • Trimmed mean CPI: 1.2 / 3.4
  • Weighted median CPI: 1.7 / 3.3

It’s just one month folks. Chill. That’s the line I would expect the Bank of Canada to apply here and perhaps by repeating their prior references to taking the ‘ups and downs’ of the measures in stride as one of their Deputy Governors once put it.

Mind you, that’s not what markets are doing in reaction to softer inflation readings than anyone expected and I’m not too thrilled about the miss. That market over-reaction is not particularly surprising given a) positioning swings in markets, and b) the heightened data sensitivity of markets in response to both stronger and weaker than expected indicators.


The BoC’s two preferred core gauges of inflation landed sharply softer than the recent trend and there was significant breadth to the softening. Trimmed mean CPI was up by just 1.7% m/m SAAR in January and weighted median CPI was up by just 1.2% (chart 1). Those are indeed soft readings. In fact, they were the softest prints since May 2020 (weighted median) and December 2020 (trimmed mean). Traditional core CPI (ex-food and energy) was also unusually weak (chart 2).

Chart 1: Canadian CPI-Trimmed Mean and CPI-Weighted Median; Chart 2: Canadian Core* Inflation

But they come on the heels of the prior month’s 4.7% and 4.8% readings in the same trimmed and median measures respectively and they were the hottest since August. Charts 3 and 4 show softness in both core goods and services prices. 

Chart 3: Canadian Goods Inflation; Chart 4: Canadian Service Inflation

Chart 5 shows what was in and out of trimmed mean CPI this time.

Chart 5: January Single-Month Components Included and Excluded from Bank of Canada Trim Core CPI Measure

The Bank of Canada is searching for a more convincing trend. One month doesn’t cut it; call it mean reversion off of a hot prior reading for now and wait for more evidence. The 3- and 6-month averages are now running at about 3¼% m/m SAAR.

Therefore we may have only just begun to enter phase 1 of assessing progress on core inflation from the BoC’s perspective as communicated since last Fall. Phase 1 requires sustained evidence that underlying inflation is moving toward 2%. Phase 2 requires evidence that this is going to be sustainable. Phase 3 could then begin to discuss when to ease if phase 1 and phase 2 go well. One month’s data doesn’t say much at all about that process. Over reacting to it could come back to bite markets in the tender spots given ongoing inflation risk in Canada.

That said, I am surprised by the breadth of the price softness in January.

  • clothing and footwear prices have usually been down by -0.1% during months of January in recent years, but this time they fell by -3.9%
  • recreation/education/reading is usually up by an average of about 0.7% m/m NSA but this time fell –0.7%. Chart 6 breaks down this component.
Chart 6: Breakdown of Monthly Changes within Recreation Education and Reading CPI Category
  • airfare has dipped -14% m/m NSA in a typical January but by fell 24% now.
  • auto prices are usually up by +1.5%, but this time they slipped by -0.1%
  • restaurant prices are usually up 0.6% m/m but this time fell by 0.1%.
  • several food categories were unusually weak (meat, dairy, bakery). Politics?

You could speculate that some of this weakness was due to El Niño but the historical evidence isn’t all that compelling. For instance, little to no snow and warmer than usual temperatures in big parts of the country probably restrained demand for winter sports equipment. Ditto for winter clothing and footwear, and demand for getaways down south. Weaker than normal natural gas and other home heating fuel prices also contributed to softness in headline inflation.

Chart 7 shows the evidence over past El Niños. If you really stretched it you could say that the peak weakness in past strong El Nino events varied each time and was then followed by rebounds, but it’s hardly a strong point. You could also argue that El Nino is tougher to evaluate in the current pandemic era.

Chart 7: Impact of Past El Nino on Canadian CPI

Charts 8–15 shows other CPI components.

Chart 8: Shelter Cost Soaring High in Canada; Chart 9: Rents Soaring in Canada; Chart 10: Canada CPI: Homeowners' Replacement Cost; Chart 11: Canada CPI: Transportation
Chart 12: Canada CPI: Gasoline; Chart 13: Canada CPI: Private Purchase of Passenger Vehicles; Chart 14: Canadian Air Transportation CPI; Chart 15: Canada CPI: Food Prices

Chart 16 shows the breakdown of the CPI basket in m/m terms and chart 17 does likewise in terms of weighted contributions.

Chart 16: January Detailed Category Monthly Change in Canadian CPI; Chart 17: January Detailed Category Contributions to Monthly Change in Canadian CPI

Charts 18–19 shows the same concepts in y/y terms.

Chart 18: January Detailed Category Contributions to 12-Month Change in Canadian CPI; Chart 19: January Detailed Category 12-Month Change in Canadian CPI

Finally, the accompanying table includes further details, micro charts, measures of standard deviations and z-score deviations from norms.

Table: Canadian Inflation Component Breakdown
Table: Canadian Inflation Component Breakdown