Canada’s Inflation Rate Falls Below Central Bank’s 2% Target

Canada’s inflation rate declined to an annualized rate of 1.8% in December as the country’s economy continues to slow.

The December inflation reading is below the 2% annualized target set by the Bank of Canada and gives the central bank room to continue lowering interest rates to spur economic growth. On a monthly basis, CPI decreased 0.4% in December from November of last year.

Economists surveyed by the Reuters news agency had expected Canada’s inflation rate to come in at an annualized 1.9% in December. Inflation in Canada has steadily declined from a peak of 8.1% in June 2022 as the central bank aggressively raised interest rates over an 18-month period.

Tax Breaks

The December inflation decline across Canada was partly the result of a temporary sales tax break enacted by the government in the lead-up to Christmas. Statistics Canada, which released the inflation data, said that 10% of items in the Consumer Price Index (CPI) were impacted by the tax relief.

However, inflation has also moved lower in recent months as the Canadian economy slows and as energy prices, including gas at the pumps, retreats. The steady decline in inflation, coupled with a slowing economy, has markets pricing in more interest rate cuts from the Bank of Canada.

Futures traders are currently pricing in an 81% chance that Canada’s central bank cuts rates by 25-basis points at its next policy meeting scheduled for Jan. 29.

Is the Vanguard FTSE Canada All Cap Index ETF a Buy?

The Vanguard FTSE Canada All Cap Index ETF (TSE:VCN), which provides broad exposure to the Canadian equity market, has a consensus Moderate Buy rating based on 160 Wall Street analysts. That rating is based on 133 Buy, 25 Hold, and two Sell recommendations issued in the last three months. The average VCN price target of $58.59 implies 13% upside from current levels.