EconoFACTS

March 21, 2023 | 09:16

Canadian CPI: Have to Admit, It's Getting Better

Economist

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience ana... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience ana... (Read more)

We now resume our regular economic programming...

Canadian consumer prices rose 0.4% in February, a touch lower than expected and mild enough to chop the headline inflation rate to a 13-month low of 5.2% from 5.9% in the prior month. In seasonally adjusted terms, the rise was a much tamer 0.1% (compared with a 0.4% m/m increase in the U.S. for the same month). Core inflation also subsided a bit, with the median measure dipping below 5% for the first time since last spring (down a tick to 4.9%), while the trim fell 3 ticks to 4.8%. The old school ex food & energy measure also dipped a tick to 4.8%, and was up 0.3% in seasonally adjusted terms, and a manageable 3.4% annualized pace over the past three months.

Overall, an encouraging set of data, with headline inflation poised to come in below the BoC's most recent estimate (of 5.4% for Q1). Moreover, we would just reinforce the point that Canada's inflation rate, while still more than double the 2% target, is at the low end of the spectrum among advanced economies—the U.S. was at 6.0% last month, Australia at 7.2%, the Euro Area 8.5%, and the UK 10.1%.

The details show that gasoline fell 4.7% y/y, the first annual drop in more than two years, while electricity prices helped with a 2.3% y/y fall. (The latter is starkly different from the U.S., where electricity prices are up 12.9% y/y.) Even grocery prices relented a bit, with the annual increase easing almost a point to 10.6%, while rents also calmed a bit to 5.4% (from 5.8%). On the other side, mortgage interest costs are now one of the biggest drivers of inflation, with the 23.9% y/y rise the fastest in more than 40 years. Many will thus point to the BoC as the "cause" of inflation, although note that inflation is still 4.7% even excluding mortgage interest costs.

One notable detail in the report is that goods inflation has dipped slightly below services inflation (to the second decimal point). This is the first time since early 2021—or about when the words "supply chain" first became a big thing—that goods inflation has been milder than services. It's pretty safe to assume that the crossover is going to stick for some time, and the focus will now be primarily on services. As if to drive home the point, vehicle prices dipped in February, trimming the annual rise to 5.3% (i.e. about in line with overall inflation), the slowest rise in a year.

Bottom Line: With inflation subsiding on both the headline and core measures, the Bank of Canada is in a less awkward position than many others during the recent financial turmoil. That is, there's really no underlying reason for the Bank to hike further, especially with the Canadian dollar finding a footing. At the same time, there is still plenty of wood to chop in order to get inflation comfortably back into the target zone. After all, while core trends have moderated, they're still above the 3% high end of the zone. Even the mildest provincial reading (3.6% in Alberta) is still a bit hot for comfort. Overall, the Bank's pause looks prudent, and we expect them to stay at current levels for quite some time, barring a major flare-up in the banking turmoil.

Table 1 - Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics