News & Analysis

Unlike in the US, headline inflation in Canada didn’t peak in March due to the spike in commodity prices. Instead, April’s CPI report showed that headline inflation rose from 6.7% in March to 6.8%, largely due to a stronger month-on-month reading of 0.6%, which more than offset the higher base effects in the annual data.

While the headline reading was slightly stronger, the significant increases in all three core measures were likely behind the diminutive market impact. The average of the Bank’s three core measures rose to 4.12% in April from 3.93%, which was already revised upwards from the preliminary reading of 3.77%. Most notably, the Bank’s core-common index, which looks to summarise the underlying inflation rate in the economy, rose above 3% for the first time since September 1991. Across the three core measures, the message to markets was clear: inflation in Canada is no longer being driven by extreme price pressures in a small subset of components, but is instead continuing to rise and broaden. This message led to USDCAD trading back to levels seen at the start of the European session, reversing the earlier bid in the dollar, while it sent front-end Canadian bond yields 3 basis points higher.

Looking under the hood, the year-over-year increase in inflation was largely driven by higher food and shelter prices; a dynamic that is yet to fade as both components contributed over two-thirds to the month-on-month increase.

Canadians paid 9.7% more in April for food purchased from stores relative to the year prior, the largest annual increase since September 1981. Within the food category, fresh fruit (+10%), fresh vegetables (+8.2%) and meat (+10.1%) remained the most expensive goods, while pasta (+19.6%), cereal products (+13.9%) and coffee (+13.7%) saw the largest annual price increases. The increase in wheat and cereal products is likely to persist given the war in Ukraine and could be exacerbated by a poor Northern hemisphere harvest in the summer. Within the shelter component, fuel oil and other fuels rose 64.4% on the year, while homeowner’s replacement cost increased 13%. The latter likely overstates the increase in shelter prices, however, as it doesn’t incorporate lower resale prices. The increase in shelter prices also went against the signal from real estate boards’ sale price and volumes data, which suggested that house prices and sales fell in Canada in April.

Goods excluding non-durables delivered a largely negligible contribution to overall inflation, netting to zero. Durable goods, which represent 14.4% of the consumption basket, fell 0.2% MoM while semi-durables, which are weighted at 6.6%, rose by 0.4%. Diminished goods price pressure is consistent with anecdotal evidence from major firms that an increase in global supply could help to bring inflation down. For instance,

Amazon’s latest earnings call indicated that the US tech giant had overbuilt capacity in response to volatile demand conditions in 2021.

A supply glut for one of the world’s largest retailers is bound to add continued downward pressure to global inflation until inventories normalise.

Shelter and food contributed an outsized 0.48pp to the 0.61% month-on-month April increase in headline CPI inflation

Overall, April’s CPI report showed inflation pressures in Canada remained robust heading into the second quarter, supporting our view that the BoC will conduct a second consecutive 50bp rate hike on June 1st to bring the policy rate to 1.5%.

While there were signs of weaknesses, such as disinflationary pressures within durable goods for example, the data was strong on the whole, making the limited market reaction intriguing. We largely chalk this up to the fact that the inflation data didn’t deviate too aggressively from economist expectations outside of the core measures, and that rates markets had already fully factored in the expectation that the BoC will hike at the next meeting by 50bps.

On a side note, today’s report also highlighted that updated basket weights for the CPI index will be implemented in May’s report on June 22nd. In addition to this, StatsCan will replace the previous proxy for used vehicle prices with administrative data and enrich the quality of data by including a new series on new car prices. At first, this information will only be accounted for in the month-on-month changes.




Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst


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