May 16, 2023 | 09:12
Canadian CPI (Apr.) — The Core Question
The Canadian inflation rate accelerated a tick to 4.4% y/y in April, stronger than the consensus call, and ending a run of five consecutive lower readings. That’s still well down from the high of 8.1% y/y set last June. While the first big leg down in inflation was quick and relatively easy, this next stage is, not surprisingly, proving to be quite a bit tougher.
Gas prices rose 6.3% in the month (nsa), a much larger increase than the small decline seen last year, which boosted the headline reading. Higher oil prices and the carbon tax contributed there. Food prices were firm, but year-over-year momentum (+8.3%) has now backed off the highs seen at the start of the year. Still, ebbing inflation momentum doesn't mean your groceries are getting any cheaper.
Shelter costs (i.e., housing) are getting interesting at this stage, with a disinflation force now giving way to upward inflationary pressure. The mechanics of how housing filters into the CPI have long suggested this would be the case, but the firming of the resale market might now make the swing more notable. In a nutshell, rising rents (+6.1% y/y) and mortgage interest costs (+28.5% y/y) flow into the CPI gradually (upward pressure there is now strong and persistent), while resale price changes hit more immediately. On the latter, the downward pull from last year’s correction has mostly dissipated, and gains in some markets through the spring could begin to pull them higher. Replacement cost is seeing month-to-month moves stabilize, while the ‘other’ component that picks up transaction prices rose in seasonally-adjusted terms in April after 10 consecutive month-over-month declines.
More broadly, services inflation is still proving stickier, with prices up 4.8% y/y compared to goods at 4.0% y/y. That said, momentum in the latter increased in April, even excluding food and energy.
Core inflation metrics all cooled in the month, with prices ex-food & energy slowing to 4.4% y/y (from 4.5%), the BoC median down to 4.2% y/y (4.6%) and the BoC trim to 4.2% (4.4%). That said, short-term momentum wasn’t favourable in April, with the BoC median posting the strongest seasonally-adjusted month-to-month print since October; and the trim seeing the strongest gain since last July. On a three-month annualized basis, both accelerated to 3.8% and 3.7%, respectively, while ex-food & energy jumped to 4.2%. This suggests that, while the year-over-year core measures continue to improve from lofty levels, there is underlying firmness in inflation at or just under the 4% mark...too high for the BoC.
The Bottom Line: Wading through all the moving parts suggests underlying core inflation is settling in around 4%, which is clearly still too high for the Bank of Canada's comfort. With policy rates on hold at 4.5%, that leaves us with slightly positive real overnight interest rates. But the 'core' question is...is that tight enough? Maybe, but we (and the BoC) will be watching how some of the more interest-sensitive sectors of the economy, and the job market, evolve in coming months.