April 21, 2021 | 09:04
Canadian Inflation: On the Double
Canadian consumer prices rose 0.5% m/m in March, which was enough to send the annual inflation rate up more than a percentage point to 2.2% from just 1.1% the prior month. The big bump in headline inflation is as much a story of base effects (i.e., prices plunged a year ago) as rising prices now—StatsCan even devoted a special box in today's report explaining this development. And this effect will weigh in yet again next month, potentially lifting inflation close to 3% before we get some relief by June. Not only will base effects turn by then, but gasoline prices will (likely) have stopped piling on.
Core inflation trends lack the fireworks of headline figures, but here, too, we are seeing some notable upswing. All three of the Bank of Canada's preferred core measures rose last month, with the average now at 1.93% from 1.77% the prior month. In fact, two of the metrics are now above the 2% level—along with headline inflation, of course—with the trim at 2.2% and median at 2.1%. StatsCan notes that ex-energy inflation is running at a mere 1.1%; we would counter that CPI ex-hotels and ex-clothing (i.e., things few are buying these days) is running at 2.7% y/y.
One area that is beginning to fuel core inflation is hot housing. While raging home prices filter into CPI in an indirect and delayed fashion, the replacement cost index (basically, new home prices) was one of the biggest contributors to the rise in inflation, both last month and over the past year (jumping 7.9% y/y). That's behind only the huge 35.3% rise in gasoline prices. Still, overall shelter costs are up at a moderate 2.4% y/y, with still-falling mortgage interest costs keeping this measure in check—for now. The third biggest contributor to inflation in the past year has been vehicle prices (+3.5% y/y), which are being driven by the fast rebound in sales amid a supply crunch on weak chip supplies. Electricity prices also added to inflation pressures, as subsidies in Ontario wore off.
Bottom Line: The big bump in Canadian headline inflation is no surprise, and look for another large step-up next month. Much more notable is the underlying firmness in core inflation, which is now just a heartbeat away from the 2% target—and powerful home prices are likely to soon push it over the top. This upswing in core may be a key talking point in today's discussion with the BoC, especially since the yearly comparisons only get tougher in the next few months. Much like the Fed, we expect that the Bank will be highly tolerant of a spell of above-2% inflation, but that day looks set to arrive a lot sooner than many expected for core inflation.