Consumer prices were 4.3% higher in March than a year prior, down sharply from the previous month’s 5.2% reading.
As will continue to be the case for the next several months, base effects were the main driver of the drop, masking a 0.5% sequential rise in month-to-month prices. Both the headline and the sequential reading were perfectly in line with economist forecasts. For core inflation, CPI-trim YoY met expectations, falling by four tenths to 4.4%, while CPI-median beat expectations by one tenth, down to 4.6% from 4.9%. Using annualised 3-month moving averages, which the Bank of Canada has put in focus in recent months, momentum in core prices was unchanged for CPI-trim at 3.3%, while CPI-median edged down by two tenths to 3.6%.
Although headline inflation is improving, we aren’t out of the woods yet
The general takeaway of the report is, with headline inflation decelerating sharply, and core pressures either unchanged or marginally improved depending on the metric, the Bank of Canada will likely view this print as in line with its current forecast for 3% by mid-year. It is worth highlighting, however, that this marks 3 consecutive months where sequential inflation was well above target, with readings of 0.5%, 0.4%, and 0.5% MoM from January through March. To be consistent with 2% annually, though, the monthly readings would need to be much lower, at around 0.165%. Additionally, while 3-month core prices decelerated sharply from the 7-8% zone last May to the 3-4% zone last August, we have seen many months of slow, grinding progress in these metrics. There is good reason for the Bank of Canada to be concerned about its upside risk of stickier-than-expected services inflation, and while today’s report does not scream “hike next meeting,” we still see a considerable risk that the Bank hikes again this cycle.
On a compositional basis, none of the major aggregates saw prices fall outright in March. Even gasoline prices, which StatCan highlighted as the main contributor of lower inflation over the past 12 months did not fall in March, rising by 1.1% instead. Additionally, real-time data from GasBuddy shows that gasoline prices are already up by 12 cents per litre or 8.2% in April relative to the average price last month. The breadth of inflation has also risen considerably, with 79% of the prices we monitor rising in excess of 3% annualised, a stark difference from the 52% figure from February’s report.
This is why we continue to emphasise that falling inflation is a mechanical illusion: consumer prices are going up in reality, even though the headline inflation statistic is falling quickly.
The biggest movers were both utilities, with electricity up 3.1% MoM, and natural gas -2.4%. Both goods (+0.6%) and services (+0.5%) posted strong sequential gains in March.
Markets largely shrugged off the report. Overnight swaps, government bond yields, and bankers’ acceptances only moved by a few basis points. While the loonie is slightly weaker than prior to the report, USDCAD has merely been trending with a broader strengthening in the US dollar. This is to be expected: with virtually every number meeting expectations, there isn’t much reason for the market to change its expectations for what the Bank of Canada will do this year. But as we have noted, once base effects fade out this summer, there is still a good chance the Bank could hike once more if the momentum in price pressures that was previously masked continues.
Details of the report are significantly worse than the headline suggests
Jay Zhao-Murray, FX Market Analyst