National Bank of Canada analysts expect Canada’s January CPI to be unchanged month on month. This could lower headline inflation to 2.3%, with CPI-trim edging down and CPI-median staying at 2.5%.
They link the flat monthly CPI to only a slight rise in petrol prices. They also expect headline goods expenditure to fall by 0.5%.
Inflation Outlook And Policy Implications
Outside inflation, they foresee December retail sales declining and modest gains in manufacturing. They also expect housing starts to strengthen, while existing home sales weaken in major cities.
On trade, they expect gold exports to support total exports. They estimate the trade deficit could narrow from C$2.2 billion to C$1.4 billion, with higher imports only partly offsetting the export rise.
The recent January CPI data confirms the trend we anticipated, with the headline inflation rate cooling to 2.4%. This figure, reported by Statistics Canada last week, was very close to our 2.3% forecast and continues the clear downward path from the highs we saw throughout 2025. This reinforces the view that the Bank of Canada’s policy is achieving its intended effect.
With inflation nearing the central bank’s 2% target, the market is now pricing in over a 60% chance of a rate cut by the July meeting. We are seeing this reflected in the derivatives market, with increased buying of call options on Government of Canada bond futures. This positioning suggests a growing consensus that the peak in interest rates is firmly behind us.
Market Positioning And Canadian Dollar
This outlook is likely to put downward pressure on the Canadian dollar in the coming weeks. We should consider strategies that benefit from a weaker CAD, especially against the US dollar where rate cut expectations are less certain. Looking back at 2025, the currency weakened each time soft inflation data surprised the market, a pattern that may repeat.
The economic picture is not uniform, as the forecast for weaker consumer spending was also confirmed. Statistics Canada’s latest release showed that retail sales for December 2025 fell by 0.2%, supporting the view of a cautious consumer heading into the new year. This soft landing scenario, where inflation cools without a severe recession, could be supportive for Canadian equities, making strategies like selling put options on the S&P/TSX 60 index attractive for collecting premium.
