The annual rate is moving in the right direction
Canada’s inflation figures for March took a step in the right direction – but the fact that each of the core measures increased on a seasonally adjusted basis indicates that “some work” remains to be done, according to BMO chief economist Doug Porter.
The headline annual inflation rate fell from 5.2% to 4.3% last month, having ticked steadily downwards since last June when inflation peaked at a 39-year high of 8.1%.
In seasonally adjusted terms, prices rose a modest 0.1% month over month (same as the US) for the second month in a row.
Porter also highlighted the moderation of major measures of core inflation by three-to-four tenths on a year-over-year basis, with median dipping to 4.6% (from 4.9%), trimmed to 4.4% (4.8%), and food and energy to 4.5% (also from 4.8%).
While this is a step in the right direction, Porter notes that “all of the core measures were up 0.3% month over month in s.a. terms, and the three-month annualized trends are holding just above 3%—good, but still some work to do.”
There were no significant surprises in the CPI data, according to Porter, as food price increases cooled somewhat, although grocery prices remain high at 9.7% year over year (10.6% in February).
He notes that there are more indications that the supply chain issues are fading away, as vehicle prices eased to 4.7% year over year from 5.3% in the prior month, and furniture and appliance prices cooled to 3.4% from 6.2% (and a peak above 10% in 2022). Gasoline prices nudged up in the month but are down a hefty 13.8% from a year ago.
Porter points out that mortgage interest costs are now the single biggest contributor to inflation, rising by a huge 26.4% on a yearly basis. Excluding this factor, CPI is up 3.6% year over year. The Bank of Canada's old measure of core—CPIX—removes both gasoline and mortgage costs, and it eased to 4.2% year over year (from 4.7%), or almost in line with headline inflation.
Overall, Porter believes that the inflation report “shows that all roads do indeed point to 3% inflation in the months ahead, with most short-term underlying metrics settling into the low-3% range. The key question for policymakers and markets is whether a 4.5% 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 3%.”
He added that there is not much here to change the near-term outlook for policy, as the Bank remains on hold, with a bias to tighten further if necessary.
