April 18, 2023 | 09:15
Canadian Inflation: FORE...point three
Canadian consumer prices rose 0.5% in March, in line with consensus and mild enough to carve the headline annual inflation rate to 4.3% from 5.2% in the prior month. Two factors cut deeply into the inflation rate even with a seemingly large monthly increase: last March saw the single biggest monthly CPI rise (+1.43%) in three decades, and March is normally a month of large price increases. In seasonally adjusted terms, prices rose a modest 0.1% m/m (same as the U.S.) for the second month in a row. The major measures of core inflation moderated by 3-to-4 tenths on a yr/yr basis, with median dipping to 4.6% (from 4.9%), trim to 4.4% (4.8%), and ex food & energy to 4.5% (also from 4.8%). While definitely a nice step in the right direction, all of the core measures were up 0.3% m/m in s.a. terms, and the three-month annualized trends and holding just above 3%—good, but still some work to do.
There were no big surprises in the CPI data, for a change. Food price increases cooled somewhat, although grocery prices are hardly calm at 9.7% y/y (10.6% in February). More indications that the supply chian issue is fading away—vehicle prices eased to 4.7% y/y from 5.3% in the prior month (and last year's peak above 8%), while furniture & appliance prices cooled to 3.4% from 6.2% (and a peak above 10% in 2022). Gasoline prices nudged up in the month, but are down a hefty 13.8% from a year ago. Note that pump prices are on track to rise by at least 5% in the current month (versus a small dip a year ago), so the disinflation help on that front will stall in next month's report. On the flip side, mortgage interest costs are now the single biggest contributor to inflation, rising a smoking 26.4% y/y. Excluding this factor, CPI is up 3.6% y/y. The Bank of Canada's old measure of core—CPIX—removes both gasoline and mortgage costs, and it eased to 4.2% y/y (from 4.7%), or almost in line with headline inflation.
Bottom Line: Today's report shows that all roads do indeed point to 3% inflation in the months ahead, with most short-term underlying metrics settling into the low-3% range. The key question for policymakers and markets is whether a 4.5% policy rate is acceptably restrictive give those inflation trends? We and the Bank of Canada believe so, but the BoC will need to be patient at that level to push inflation back into the target zone below 3%. Overall, there's thus not much here to change the near-term outlook for policy. The Bank remains on hold, with a bias to tighten further if necessary.