March 17, 2021 | 09:08
Canadian Inflation: First Shot
Canadian consumer prices rose a hefty 0.5% in February, lifting the headline annual inflation rate a tick to 1.1%. This is actually a bit lighter than consensus expectations (although a snick above our below-consensus call). Still, it's just the opening shot in what is about to be a rapid, albeit temporary, run-up in headline inflation in the coming months, when prices will be compared with the exceptional conditions of last spring.
After last month's fiasco on core inflation—when initial revisions printed much lower readings, but then the revisions were pulled—the story on underlying prices was uneventful this time. Only one of the three main measures even budged, as the trimmed mean dipped a tick to 1.9%. Median prices held fast at 2.0%, while the common component measure stayed very tame at 1.3%. Thus, the average of the three dipped only slightly to just above 1.7%, which just so happens to be right in line with the median of the past decade.
Digging into the details reveals some extreme moves both on the high and low side last month, in keeping with the extremes among various sectors in the overall economy. No surprise that gasoline prices were the largest driver in February, jumping 6.5% m/m and now up 5% y/y—that's the first annual increase in a year, and it's poised to really pop. (In the latest weekly reading, pump prices were up 44% y/y, and are about to be up more than 60% y/y, even if they just hold steady, due to a plunge last year.) Food prices also showed a bit of pop, but the bigger picture is that they are relatively restrained at 1.3% y/y for groceries alone, and 1.8% when restaurants are included.
Helping hold inflation in check last month were pullbacks in telephone services and a record drop in sporting & exercise equipment, plunging 14.1% m/m. (Two months into 2021, and all New Year's resolutions are already out the window?) Clothing prices remain predictably soft, falling almost 5% y/y. Another factor holding prices back was yet another drop in StatsCan's measure of mortgage interest costs; these have dropped 5.4% y/y, which has helped offset the massive upswing in home prices (up 7% y/y). On balance, the "owned accommodation" component has remained remarkably steady at just over 2%, despite the raging housing market. With mortgage rates now edging higher and home prices flaring even higher, look for some upswing on this front ahead.
Bottom Line: While there is plenty of churning beneath the surface, the bigger picture remains intact for the inflation outlook from our perspective. Headline inflation is still right on track to hit nearly 3% in the spring, but then fade back towards just above 2% through the second half of the year. The overall stability in core inflation reinforces the point that while there are serious risks to the outlook, the most likely outcome on the other side of this traumatic episode is for inflation to re-emerge still close to its 2% trend.