Canada’s CPI inflation slowed in January. Headline inflation was 2.3%. Inflation excluding indirect taxes was 2.1%, down from 2.5% in December.
The Bank of Canada’s core trim and core median measures eased to an average of 2.5% year over year. That was down from 2.6% in December, after a 0.1% month-on-month rise.
Core Inflation Trends
Core trim and core median came in at 2.4% and 2.5%. Both are still above the Bank’s 2% target. Over the past three months, they averaged a 1.2% annualised rate.
The share of the CPI basket seeing unusually fast price increases also declined. About 23% of the basket rose at an annual rate above 5% over the last three months. That was down from 28% in December and 30% in November.
Overall, the data gives policymakers more room to cut interest rates if the economy weakens. The base case mentioned in the source did not assume further rate cuts, even as grocery and services prices stayed high.
From our perspective in mid-February 2025, the January inflation report is an important shift. With headline inflation down to 2.3%, the Bank of Canada has more flexibility to cut rates if the economy continues to soften. This supports the view that the next move in policy is likely to be a cut.
Market Implications For Rates
The Bank’s preferred core measures have eased to 2.5%. The annualised pace over the past three months was a very low 1.2%. With the policy rate held at 4.25% since December 2024, markets are likely to price in a higher chance of a rate cut at the spring meetings. This could support strategies that benefit from lower yields, such as buying call options on Government of Canada bond futures.
A more dovish Bank of Canada also tends to weigh on the Canadian dollar, especially versus the U.S. dollar. The Federal Reserve has been more cautious about when it might cut rates. If this policy gap widens, it could favour trades that expect a weaker loonie, such as buying puts on CAD futures. This has been a key theme we have tracked since the start of the year.
This inflation report follows weak growth data. Canada’s GDP growth nearly stalled in Q4 2024, and the unemployment rate rose to 5.8% in January 2025. If rate cuts arrive sooner than expected to support the economy, Canadian equities could benefit. That could lead to more interest in call options on the S&P/TSX 60, as traders position for easier financial conditions.
Disinflation also appears to be spreading across more categories, rather than being limited to a few items. The share of the basket with high price growth fell to 23% in January, continuing the drop from 30% in November 2024. This steady trend strengthens the case for the Bank of Canada to act, and it may also reduce implied volatility in rate markets as the policy path becomes clearer.
Create your live VT Markets account and start trading now.
here to set up a live account on VT Markets now
