'Canada could still end up in a better trade situation than many other countries': Bartlett

Canadian CPI Data - January 2024 Analysis

Key Concepts:

• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Year-over-Year (YoY) Inflation: The percentage change in the CPI over the past 12 months.
• Headline Inflation: CPI without excluding any components.
• Core Inflation: CPI excluding volatile components like food and energy.
• GST/HST: Goods and Services Tax/Harmonized Sales Tax – a value-added tax in Canada.
• Bank of Canada (BoC): Canada’s central bank, responsible for monetary policy.
• KUSMA (Canada-United States-Mexico Agreement): A free trade agreement replacing NAFTA.
• Structural Trade Shock: A significant disruption to trade patterns, often due to policy changes.

1. Inflation Overview & Initial Reaction

Stats Canada released CPI data for January 2024, showing inflation at 2.3% year-over-year, a decrease from December’s 2.4%. Randall Bartlett, Deputy Chief Economist at Dejardins, characterized this as “even better than in line” with expectations, as consensus predicted inflation would remain at 2.4%. He noted that all metrics contributing to the consensus survey came in below expectations, suggesting a positive inflation print. This supports the Bank of Canada maintaining its current monetary policy ("remaining on hold") for the foreseeable future.

2. Impact of GST/HST Break & Food Prices

The temporary removal of GST/HST impacted the data. While food prices purchased at restaurants rose significantly (12.3% year-over-year) due to the expiry of the GST/HST exemption implemented in January 2023, this increase was offset by a larger decline in gasoline prices. Removing food and energy, core inflation came in at 2.4%, down from 2.6% in December. This indicates a broader trend of prices moving in the right direction.

3. Bank of Canada’s Policy & Trade Negotiations

Martin discussed the challenges faced by Tiff Macklem, Governor of the Bank of Canada, due to global uncertainties, particularly trade negotiations. However, Bartlett argued that removing retaliatory tariffs and the consumer carbon price in 2023 simplified the BoC’s job by keeping inflation near the 2% target. This allows the BoC to focus on the real economy and provides room for potential support in case of negative economic shocks. Bartlett stated, “by removing the retaliatory tariffs, by removing the consumer carbon price…This really helped make the Bank of Canada's job a lot easier by keeping inflation relatively close to the bank's 2% target.”

4. Areas of Concern & Positive Trends

While overall inflation is trending downwards, concerns remain regarding food inflation, which is higher than desired. The Bank of Canada attributes this to imported factors, including US tariffs and ongoing supply chain disruptions stemming from the US-China trade war. However, positive trends are evident in key CPI components like shelter, with both ownership costs (due to decelerating mortgage interest rates) and rents showing deceleration. Bartlett emphasized that broad groups previously driving inflation are now moving in the right direction.

5. Interest Rate Outlook & Potential Shocks

The discussion touched on the nuanced interest rate outlook. While no rate cuts are immediately expected, the possibility of a rate increase later in the year was acknowledged. Some argue the BoC is behind the curve. Bartlett highlighted the BoC’s view that structural shocks, like trade issues, are best addressed by fiscal policy (trade negotiations, infrastructure investment) rather than monetary policy. The potential impact of KUSMA negotiations was raised as a significant risk.

6. KUSMA & Trade Risk Assessment

Canada has largely avoided the worst of US tariffs due to exemptions for KUSMA-compliant goods, resulting in an average effective tariff rate of just under 4% on exports to the US, compared to over 10% for countries like China and Germany. Dejardins is preparing a report analyzing potential scenarios based on different KUSMA outcomes. The risks are considered tilted to the downside, but Canada could still end up in a better trade situation than many other countries. Bartlett noted, “Canada's really benefited from that exemption for KUSMA compliant goods.”

7. Data & Statistics Mentioned:

• January 2024 CPI: 2.3% year-over-year.
• December 2023 CPI: 2.4% year-over-year.
• Food prices at restaurants (January 2024): Up 12.3% year-over-year.
• Core Inflation (January 2024): 2.4% (down from 2.6% in December).
• Average effective tariff rate on Canadian exports to the US: Just under 4%.
• Average effective tariff rates for other countries (China, Germany, Japan, South Korea): North of 10%, some approaching 40%.

Synthesis/Conclusion:

The January 2024 CPI data presents a generally positive outlook for Canadian inflation, coming in below expectations and supporting the Bank of Canada’s current monetary policy stance. While concerns remain regarding food inflation and potential economic shocks (particularly related to KUSMA negotiations), broader trends indicate prices are moving in the right direction. The Bank of Canada appears to be prioritizing a focus on the real economy and maintaining flexibility to respond to unforeseen challenges. The upcoming Dejardins report on KUSMA scenarios will provide further insight into potential trade-related risks.