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Canada's January Annual Inflation Rises to 1.9%, Core Measures Increase

Canada's annual inflation rate edged up to 1.9% in January from the previous month due to increased gasoline and natural gas costs, offsetting the impact of a sales tax relief on overall consumer prices, official data revealed on Tuesday.

The core measures of the consumer price index, which have been relatively stable in recent months, also increased slightly.

January's CPI figures marked a six-month period where inflation remained at or below the 2% mark – the midpoint of the Bank of Canada's target range of 1%-3%. However, underlying price pressures decreased market expectations of an interest rate cut next month, with a nearly 63% chance now seen for no rate cut in March, compared to 56% before January's inflation data was released.

The projection for a possible rate cut may change significantly if the U.S. President decides to impose tariffs on Canadian imports starting in March.

"Stronger inflation supported by retailers' pricing strategies and improved economic activity in the fourth quarter may provide the Bank of Canada with the confidence to maintain current interest rates at its upcoming March meeting," noted Andrew DiCapua, Principal Economist at the Canadian Chamber of Commerce. This potential pause would allow policymakers to assess the effectiveness of current measures in fostering growth amidst a highly uncertain economic environment.

The annual inflation rate reported on Tuesday aligned with analysts' forecasts. In December, inflation was at 1.8%. On a monthly basis, prices increased by 0.1% in January, according to Statistics Canada.

The government's temporary tax exemption on various products, including food, beverages, restaurant meals, and children's clothing between mid-December and mid-February, played a key role in alleviating inflationary pressures, the report stated.

Moreover, the prices for food in the consumer basket dropped by 0.6% year-over-year in January, marking the first decline since May 2017, predominantly influenced by a significant 5.1% decrease in prices for restaurant-bought food.

Had it not been for the tax relief, consumer prices would have risen by 2.7%, as explained by Statscan. Excluding the tax cut in December, prices would have increased by 2.3%.

On Tuesday, the Canadian dollar weakened, trading down 0.13% at 1.4199 against the U.S. dollar, or 70.43 U.S. cents.

Yields on the two-year government bond climbed by 6.8 basis points to 2.797%.

Economists pointed out that the sales tax exemption had distorted overall inflation figures, and that core inflation offered a more accurate representation of consumer price trends.

The Bank of Canada focuses on two core inflation measures: CPI-median and CPI-trim. CPI-median, which represents the midpoint of price changes in the consumer basket, increased to 2.7% from an upwardly revised 2.6% in December. Likewise, CPI-trim, excluding extreme price fluctuations, rose to 2.7% from 2.5% in the previous month.

In December, inflationary pressures were primarily driven by an 8.6% surge in fuel prices paid by Canadians at gas stations, along with a 4.8% uptick in natural gas prices and the first year-over-year rise in passenger vehicle costs in eight months mentioned by Statscan.

With inflation maintained at or below the Bank of Canada's 2% target, the bank has been able to implement the most aggressive rate cuts among the G7 nations, reducing the last month.