News & Analysis

Canada’s headline inflation figure leapt from 5.7% YoY in February to 6.7% in March. The percentage point increase in the annual headline figure was the largest gain since January 1991, when the goods and services tax was first introduced.

That wasn’t the only long-standing record that was broken by March’s CPI report. The month-on-month gain in headline inflation, measuring 1.4%, was also the largest since January 1991. Meanwhile, stripping out the effects of gasoline, the CPI index still rose 5.5% year-on-year, the fastest pace since the introduction of the all-items excluding gasoline aggregate in 1999. Removing outliers further are the Bank’s three core measures– common, trim and median. The composite of the three measures rose from 3.53% in February to 3.77% in March. Every permutation of March’s CPI data highlights just how hot inflation conditions in Canada are, especially after the initial impact of the Ukrainian war is factored into fuel and food prices.

Today’s data confirms that the Bank of Canada took the right decision by hiking rates 50bp last week, and should the April CPI report released on May 18th show a robust pace of shelter and food price increases, we expect the BoC to conduct back-to-back 50bp hikes at the June 1st meeting. This is a scenario that money markets only assigned a 72.5% probability prior to today’s report.

Gasoline was by and large the main positive contributor to the upside inflation surprise, rising 11.8% MoM and 39.8% YoY in March. With a 16% contribution to the overall CPI basket, the sharp increase in gasoline prices resulted in transportation adding over 0.55% to the 1.4% month-on-month increase in the headline rate.  That was well-expected considering the inflationary surge stemming from the Russia-Ukraine conflict restricting supply in global energy markets. Also relating to the conflict was food prices, which rose 8.7% year-on-year, up from 7.4% in February. While some of this was due to the changes in dairy prices implemented by the Canadian Dairy Commission in February, the prices of wheat and cereal prices showed a more exponential increase that was driven by a 14-year high carved in wheat futures prices due to the outbreak of conflict. Other major contributors were related to accommodation and vehicles. The prices of goods rose 2.3% MoM, with both durables and non-durables up 2.5%.

Although a large proportion of March’s inflation overshoot can be mapped back to the outbreak of the Ukraine conflict, the Bank of Canada won’t be able to point to the war as a reason for inflation rising further above target.

Although semi-durables, which include clothing and footwear, increased by a relatively more muted 0.6%, in line with the gain in services, a 0.6% increase is more than 3 times faster than the pace consistent with 2% annual inflation. This highlights how inflation pressures remain substantial in the economy, especially in sectors where tighter monetary policy can be effective. If anything, it isn’t the rise in headline inflation but the increase in domestic inflation measures that suggest the Bank of Canada cannot slow down the pace of policy tightening just yet.

All CPI aggregates show inflation ticking higher in March, even those not directly impacted by the war in Ukraine

The Canadian dollar rallied strongly on the announcement, with USDCAD falling to a low of 1.2507. Meanwhile, Canadian 2Y bond yields rose 5bps to 2.56%, outpacing a single basis point gain in US yields.

Market-based estimates of the number of interest rate hikes priced in for the Bank of Canada’s next meeting on June 1 reacted to the data with incredible volatility. The knee-jerk reaction in OIS markets saw the implied probability of a 50bp policy change range from 65% to 105%. While the adjustment deviated to the downside from the stable 82-90% range in the days prior, we expect it to settle closer to a 100% probability of a 50bp hike in the coming hours as the CPI report is digested. This should keep the loonie supported along with front-end Canadian bond yields as markets reposition for a more hawkish BoC despite the fact that the meeting is still some six weeks away.

USDCAD drops further towards the 1.25 handle as March’s CPI report boosts front-end Canadian bond yields as markets adjust for an increased likelihood of another 50bp hike by the BoC



Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst


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