Consumer price index data puts inflation on track to slow to 3% this year
Published Apr 18, 2023 • Last updated 16 hours ago • 6 minute read
While inflation appears to be moving in the right direction, economists warned of some “sticky” areas that could prove challenging to the Bank of Canada. Photo by Darren Calabrese/National Post The latest consumer price index data puts inflation on track to slow to three per cent this year, at the top end of the Bank of Canada‘s target range, say economists.
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Access articles from across Canada with one account. Share your thoughts and join the conversation in the comments. Enjoy additional articles per month. Get email updates from your favourite authors. Headline CPI rose 4.3 per cent year over year and 0.5 per cent on a monthly basis (not seasonally adjusted), matching analyst estimates.
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The yearly change “was the smallest increase since August 2021,” when CPI rose 4.1 per cent, Statistics Canada said in its data release on April 18.
Much of the annual deceleration comes from the comparison to March 2022 when prices were spiking in the wake of Russia’s invasion of Ukraine.
Gas prices, for example, have dropped 13.8 per cent from last year, the biggest annual decline since July 2020.
While inflation appears to be moving in the right direction, economists warned of some “sticky” areas that could prove challenging to the Bank of Canada.
Douglas Porter, chief economist at BMO Economics, warned in his note that prices at the gas pump “are on track to rise by at least five per cent in the current month, so the disinflation help on that front will stall in (April’s) report.”
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TD Bank highlighted services, up five per cent in March — “where it has been for nearly a year” — as a stubborn point for inflation.
The path inflation takes will determine the Bank of Canada’s next move.
The central bank held its benchmark lending rates at 4.5 per cent at its meeting on April 12, its second hold in a row, after hiking rates by 425 basis points starting in March 2022 to cool historically hot inflation.
Bank of Canada governor Tiff Macklem said at the April 12 that the bank was committed to getting inflation back to its two per cent target rate and that rates would go up if necessary.
Here’s what economists are saying about the numbers and what they mean for the Bank of Canada and interest rates.
Douglas Porter, BMO Economics Advertisement 4 This advertisement has not loaded yet, but your article continues below.
“Today’s report shows that all roads do indeed point to three per cent inflation in the months ahead, with most short-term underlying metrics settling into the low-three per cent range. The key question for policymakers and markets is whether a 4.5 per cent policy rate is acceptably restrictive given those inflation trends? We and the Bank of Canada believe so, but the BoC will need to be patient at that level to push inflation back into the target zone below three per cent. Overall, there’s thus not much here to change the near-term outlook for policy. The bank remains on hold, with a bias to tighten further if necessary.”
Leslie Preston, TD Economics “Inflation continued to move in the right direction in March, supporting the Bank of Canada’s stand pat rate decision last week. As outlined in our recent forecast, we expect core inflation to continue to decelerate below three per cent year over year in the second half of the year, as does the Bank of Canada.
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Article content “However, the persistently high level of demand-sensitive services inflation, or “supercore,” speaks to the challenge governor (Tiff) Macklem talked about last week in bringing inflation all the way back to two per cent. This suggests that the BoC needs to remain vigilant to inflation pressures, and may need to hike again if momentum in the domestic economy does not cool as expected.”
Jay Zhao-Murray, currency market analyst, Monex Canada “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 three by mid-year. It is worth highlighting, however, that this marks three consecutive months where sequential inflation is well above target, with readings of 0.5 per cent, 0.4 per cent, and 0.5 per cent month over month from January through March. To be consistent with two per cent annually, though, the monthly readings would need to be much lower, at around 0.165 per cent. Additionally, while three-month core prices decelerated sharply from the seven to eight per cent zone last May to the three to four per cent 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.
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Article content “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 per cent instead. Additionally, real-time data from GasBuddy shows that gasoline prices are already up by 12 cents per litre or 8.2 per cent in April relative to the average price last month. The breadth of inflation has also risen considerably, with 79 per cent of the prices we monitor rising in excess of three per cent annualized, a stark difference from the 52 per cent figure from February’s report. ”
Inflation drops below 5%: What that means to Canadians Canadians are about to be hit by the full shock of rising interest rates Advertisement 7 This advertisement has not loaded yet, but your article continues below.
Charles St-Arnaud, Alberta Central “The recent trend in CPI’s monthly changes suggests that inflationary pressures have been relatively stable in recent months and consistent with core inflation at around three per cent. The three-month annualized change in most CPI components remains below their year-on-year changes, suggesting that inflation should continue to moderate. The three-month annualized change in headline CPI is now at 2.1 per cent, in line with the BoC’s target band. The measure for CPI excluding food and energy is at 3.1 per cent, only marginally above the BoC’s target range, while it is 2.4 per cent for the BoC’s old measure of core (CPI excluding the eight most volatile components and indirect taxes).
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Article content “Inflation has clearly peaked and continues to moderate. However, it remains well above the BoC’s target of two per cent, inflation expectations are elevated, and inflationary pressures remain broad and likely sticky. Nevertheless, the BoC will welcome an inflation dynamic, as measured by the three-month annualized changes, consistent with inflation reaching the upper band of its inflation target. In our view, this supports the case for the BoC to leave its policy rate unchanged at 4.5 per cent for the rest of the year.”
Stephen Brown, Capital Economics “While base effects helped to pull headline inflation sharply lower in March, there were also some encouraging signs in core inflation, as the average three-month annualized gain in CPI-trim and CPI-median (Bank of Canada preferred inflation measures) fell to a 16-month low. We continue to expect headline inflation to fall faster than the Bank of Canada expects this year.”
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Article content Claire Fan, RBC Economics “Inflation is still running above the Bank of Canada’s target, but has shown persistent signs of easing. Interest rate increases over the last year are expected to continue to filter through to raise household debt payments with a lag. That should keep slowing consumer spending, and further ease price pressure ahead. Core CPI readings are expected to return back to around three per cent (the top end of the BoC target range) by the end of this year. The BoC is expected to stay on the sideline until that happens, holding the overnight rate at the current 4.5 per cent.”
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