Canadian Inflation Slows, At Target When Mortgage Interest Is Excluded

Canadian inflation data shows growth is slowing much faster than anticipated. Statistics Canada (Stat Can) released the Consumer Price Index (CPI) for January, showing annual growth slowed significantly more than the consensus forecast. Most of the remaining pressure driving inflation is being driven by mortgage interest costs. If excluded, like in many advanced economies, CPI would be smack on the central bank’s target rate for inflation. 

Canadian Headline Inflation Dropped Much Faster Than Expectations

Canadian headline numbers came in significantly lower than expectations. CPI annual growth came in at 2.9% in January, a significant trim from the 3.4% reported a month before. Experts had a consensus estimate of 3.3%, so needless to say this was a huge surprise. 

Canadian Inflation Continues To Moderate 

The 12-month change in the consumer price index (CPI) and CPI excluding gasoline. 

Source: Statistics Canada. 

“There is little debate on this one—it’s a much milder reading than expected, especially given the high-side surprise seen in last week’s round of U.S. inflation reports, a nice contrast,” explained Douglas Porter, Chief Economist at BMO.  

He sees downward pressure on price growth across the board, but a handful of items are driving most of last month’s move. 

Plummeting annual growth for gasoline prices (-4.0%) did most of the heavy lifting. Excluding gas, CPI slowed to 3.2% annual growth, trimming 0.2 points from the previous month. That’s a lot of downward pressure based on just gas. 

Unusually large movements were also observed in a few other areas, applying the rest of the downward momentum. Monthly declines in airfare (-23.7%) and clothing (-3.3%) were significant, though it’s hard to see these as long-term movements. Grocery also made the smallest advance in years (+0.1%), helping to moderate pressures.  

“While there were a few random drivers—such as a deep drop in airfares—the report was broadly lower than expected, with all major measures of core inflation also taking a step back (trim down 3 ticks to 3.4% and median down 2 ticks to 3.3%),” wrote Douglas Porter, chief economist at BMO.

Canadian Inflation Would Be Just 2% If Mortgage Interest Is Excluded

The only area working against the data is shelter costs. Annual growth for rental prices (+7.7%) continues to surge, even showing some acceleration. At the same time, mortgage interest costs (+27.4%) only advanced slightly, but remain astronomically higher. 

“The latter are the number one driver of inflation, and inflation excluding mortgage interest costs is now at 2.0% on the button,” highlights Porter. 

He also points out that if mortgage interest was excluded, CPI would be at 2.0% exactly. 

It’s worth noting that Canada’s inclusion of mortgage interest is unusual. Neither the EU’s Eurostat or the US BLS include mortgage interest in their CPI calculations. The latter instead, explains that mortgage interest is considered a capital expense for an investment, not a regular consumption.  

The recent data highlights Canada’s somewhat circular approach to including mortgage interest. Its largest inflation driver is mortgage interest, which itself is priced relative to inflation expectations. Genius.  

Canada’s Central Bank Likely Hesitant, But Cuts May Come By June

Progress on inflation is even being seen in the BoC’s preferred measure, Core CPI. However, both numbers remain above the target rate of 3%, which the central bank will not be happy to see. 

“While no doubt welcome news, the Bank of Canada will likely remain cautious in the face of still-strong wage gains, firm services prices, and the reality that core inflation is still holding above 3%,” said Porter. 

Adding, “But clearly today’s result makes rate cuts much more plausible in coming months, and we remain comfortable with our call that the Bank will begin trimming in June.”

A forecast that’s similar to those from most of the country’s large institutions. That is, if consumers don’t get ahead of themselves and go on a spending spree in anticipation of lower rates, instead of waiting for them. 



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  • Mark 2 months ago

    If this stays, than rates will go down here, but Fed most likely will stay put, so the spread on our bonds will get bigger and Canadian buck weaker driving costs and inflation back up. Ooops…what to do?

  • Ellyn D’Uva 2 months ago

    Canada is back! Now is the time to buy.

  • Andrew Baldwin 2 months ago

    Daniel, you really understate just how out of step our central bank is in including mortgage interest in the inflation measures it looks at. The Bank of Canada is the only central bank in the world that has a target inflation indicator which is sensitive to mortgage interest rates besides the Bank of Canada. Perhaps everyone on the Governing Council are big Björk fans. (I didn’t write “that includes mortgage interest cost” because the world’s oldest central bank, the Swedish Riksbank, targets CPIF, which does include interest payments but keeps the interest rate fixed. The “F” in CPIF stands for fixed. So the Swedish Riksbank is the only other central bank, with the Central Bank of Iceland, that includes mortgage interest cost in its CPI, although without much damage done, since big interest rate hikes and drops by the Central Bank have no impact on the CPIF. Nevertheless, maybe the Governing Council of the Bank of Canada are also big Abba fans.
    As for core inflation, here the Bank of Canada is truly marching to a different drummer. Prior to the ill-fated 2016 renewal of the inflation-control agreement, its operational guide was the CPIX, an exclusionary core measure that excluded mortgage interest as well as seven other volatile items. This was in line with other central banks. NOT ONE of them are sensitive to mortgage interest rate changes, and, as mentioned, except for the Swedish Riksbank, not one favours a core measure that includes mortgage interest costs at all. None of the three non-exclusionary measures that replaced CPIX exclude mortgage interest cost, although all of them could have. After all, in spite of their non-exclusionary label they exclude changes in indirect taxes and subsidies.

  • Andrew Baldwin 2 months ago

    Doug Porter, for no very good reason, privileges the CPIXFE core measure in his CPI analysis, along with the CPI-median and CPI-trim measures that are part of the Bank of Canada’s operational guide. (By the way, how did CPI-common, the cuckoo in the next, get dropped from the operational guide shortly AFTER the 2021 renewal of the inflation-control agreement. Isn’t the whole point of these five-year renewals to establish a framework for the next five years. What defects in the CPI-common suddenly became obvious after December 2021 that weren’t obvious before then?) The CPIXFE was never the operational guide of the Bank of Canada, as were the CPIXFET, until 2001, and the CPIX, from 2001 until 2012. The only reason, not a very good one, for Doug favouring CPIXFE over CPIXFET is it is published with the other inflation measures, while CPIXFET, along with CPIW, is unaccountably published with a one-day lag. And in December and January, the CPIXFET series unadjusted for seasonal variation was showing a substantially lower 12-month inflation rate than CPIXFE. Doug notes that “the 3- and 6-month trends for both [CPI-median and CPI-trim] are still stuck a bit above 3%, so the Bank of Canada won’t relax just yet.” Maybe so, but the 3-month annualized CPIX inflation rate (based on the seasonally adjusted CPIX) has been 2.4% or less from October 2023 forward, and in January 2024 was just 1.6%, substantially under the 2% target. Maybe Doug, like our central bank, has been monitoring the wrong measures of core inflation.

  • Andrew Baldwin 2 months ago

    The Daily release says: “Year over year, gasoline prices fell 4.0% in January following a 1.4% increase in December, largely due to a base-year effect. In January 2023, prices at the pump increased amid refinery closures in the southwestern United States following Winter Storm Elliott.” The January 2023 increase was 4.7%, however the exit effect was slightly less in magnitude. The 11-month inflation rate for December 2023 (-3.12%) less the 12-month inflation rate for December 2023 (1.44%) equals -4.56%, so this is the exit effect. Its absolute value is lower than the January 2023 monthly inflation rate because the 11-month decrease from January 2023 to December 2023 dampened the exit effect slightly. Nevertheless, the exit effect dominated the entry effect created by January 2024 monthly decrease of 0.95%, which was itself slightly dampened by the same 11-month decrease. StatCan really should can its “base-year effect” jargon, sepecially since what we are talking about is an exit effect calculated as the difference between inflation rates with the same given month but different base months.

  • Oliver 2 months ago

    Who wants to invest in a country with a woke neo-Marxist government at the helm

  • Frank 2 months ago

    The wage spiral is probably due to lack of raises to match inflation. Even though inflation is slowing, prices of food , RVs, autos aren’t dropping. Of course BOC will hesitate until June instead of propping up the spring market. Most Realtors are saying once the cuts begin, the market will turn on a dime. Some are jumping in now with a variable mortgage even on interest only, and once rates drop keep the payments the same. That way they can afford the house they want now, and pay down the mortgage later.

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