Lower-than-expected reading could open door to policy adjustments
BMO is forecasting a June start to rate cuts amid news that the headline inflation rate has dropped slightly to 2.8%.
The Bank of Canada (BoC) had been expecting first quarter inflation to average at 3.2%, but February data has shown that the average is now headed below the three-percent mark.
“That's a big and welcome difference,” said Doug Porter, chief economist at BMO.
The BoC’s two main inflation measures decreased by 0.2 percentage points, with the median core inflation rate softening to 3.1%, the lowest point since 2021. Similarly, the trim measure has improved to 3.2%.
Porter also noted the deceleration in core inflation metrics, as most of them rose only 0.1% month over month in seasonally adjusted terms.
“The median is now up at just a 2.1% a.r. on a three-month pace, and 2.5% for six months—the BoC will be encouraged,” he said.
February’s unexpected drop in inflation was widespread across various sectors, including clothing and footwear, groceries, alcohol and tobacco, and household operations.
The clothing sector saw a 2.7% drop in seasonally adjusted terms, suggesting a decrease in consumer spending on non-essential items.
Jewellery prices also plummeted by 9.2% month-over-month, marking the most substantial decrease ever recorded in this category.
Meanwhile, grocery prices softened with a one-percentage-point decline in the annual rate to 2.4%, compared to a 10.6% increase the previous year.
“Given food's heavy importance in consumer inflation expectations and perceptions, that slowdown is a big relief,” said Porter.
Regionally, a total of four provinces saw inflation rates of 2% or lower. Only Alberta and Quebec had rates exceeding 3%, as they reported inflation at 4.2% and 3.3%, respectively.
“The softness of the domestic economy and increasing slack driven by higher rates is helping put downward pressure on inflation, just as the BoC intended,” said Porter. “At a minimum for April, look for the Bank to open the door to rate cuts. BMO continues to call for a June start to rate cuts, and this report certainly reinforces our conviction.”
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