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Nuthawut Somsuk

The annual inflation rate slowed more than expected in January, suggesting the Bank of Canada will stick to its decision to pause interest rate hikes as an overheated economy cools.

In its consumer price index report released Tuesday, Statistics Canada said the deceleration in headline inflation to 5.9% in January from 6.3% in December reflects a base-year effect.

A base-year effect refers to the impact of price movements from a year ago on the calculation of the year-over-year inflation rate.

Given much of the acceleration in price growth happened in the first half of 2022 as the threat of Russia invading Ukraine turned into a reality, the federal agency said the annual inflation rate will continue to slow in the coming months.

The last time Canada’s annual inflation rate was below 6% was in February 2022 when it was 5.7%.

The headline rate came in lower in January than many commercial banks were anticipating in their forecasts, signalling good news for the Bank of Canada.

Last month, the Bank of Canada hiked its key interest rate for the eighth consecutive time since March 2022, bringing it from near zero to 4.5%. That’s the highest it’s been since 2007. At the time, the central bank said it would take a “conditional” pause to assess the effects of higher interest rates on the economy.

In an interview, BMO chief economist Douglas Porter said the positive surprise was “very welcome,” but noted some of the decline in headline inflation had to do with one-off events. For example, prices for cellular services were down because of extended Boxing Day sales.

“On balance, this slightly takes the pressure off of the Bank of Canada,” Porter said, adding that an interest rate hike in March is most likely off the table.

But Canadians experienced no slowdown in the cost of groceries last month as prices rose faster on a year-over-year basis.

Grocery prices were up 11.4% compared with a year ago, marking an acceleration from 11% in December. The federal agency said prices for meat, bakery goods and vegetables all rose faster.

Porter said the food inflation was the “one piece of bad news” in the January inflation report.

The chief economist stressed that soaring grocery prices is a global phenomenon, noting it is “not a Canadian story alone.”

Some factors playing into this, he said, include avian flu affecting poultry products and the war in Ukraine affecting vegetable oil and grain prices.

On a monthly basis, higher gasoline prices in January drove the overall price level higher compared with December. The federal agency said the consumer price index rose 0.5% in January after declining by 0.6% a month prior.