Story by Kevin Carmichael • Yesterday
Statistics Canada's consumer price index increased 4.3 per cent from March 2022, the smallest year-over-year increase since August 2021.© Provided by Financial Post
Canada’s primary gauge of cost pressures suggests inflation dropped to its slowest pace since the summer of 2021 in March, reducing the odds of more interest rate increases, at least for now. Here’s what you need to know:
Statistics Canada’s consumer price index increased 4.3 per cent from March 2022, the smallest year-over-year increase since August 2021.
Excluding food and energy, the year-over-year increase was 4.5 per cent, down from 4.8 per cent in February. Excluding mortgage interest costs, the index increased 3.6 per cent, compared with 4.7 per cent the previous month.
On the month, the consumer price index rose 0.5 per cent from February, compared with a month-to-month gain of 0.4 per cent in February.
The two measures of “core” inflation that the Bank of Canada watches to avoid being distracted by volatile prices, CPI-median and CPI-trim, slowed to 4.6 per cent and 4.4 per cent respectively.
The speed of price increases has slowed, but the cost of living remains elevated, as the consumer price index was 8.7 per cent higher in March than 18 months earlier.
Backstory
Year-over-year increases in the CPI surged to 8.1 per cent in June 2022, representing the peak of the worst inflation scare since the early 1980s. The Bank of Canada — like every other central bank — was initially complacent, assuming the cost pressures were the result of idiosyncratic events such as post-pandemic supply-chain snarls and Russia’s war in Ukraine. But the central bank eventually realized that a significant amount of the cost pressure was also coming from domestic demand.
Governor Tiff Macklem raised the benchmark interest rate 4.25 percentage points between March 2022 and January 2023, the most aggressive series of rate hikes in the Bank of Canada’s history. Now that headline inflation is quickly slowing, the central bank has decided to pause, but Macklem last week warned that increases could resume because he’s worried inflation could still get stuck above the central bank’s two-per-cent target.
What’s driving the decrease
Simple math explains much of the slowing of inflation. By convention, year-over-year changes in the CPI — a compilation of the costs of obtaining hundreds of goods and services — is the standard way of defining inflation. A year ago, amid the worst outbreak of inflation in four decades, the index surged higher. Now, Statistics Canada is comparing current prices against that elevated base. The index jumped an outsized 1.4 per cent in March 2022 from the previous month. Prices are no longer increasing at such a pace, so the headline number is falling.
Life is still expensive
Headline inflation closer to four per cent than eight per cent is a relief, but it might not feel like it for a lot of households. The Bank of Canada’s interest rates increases are biting harder: mortgage interest costs increased 26.4 per cent from March 2022, an acceleration from 23.9 per cent in February and the biggest increase on record, Statistics Canada said.
The cost of food purchased at stores slowed, but was nonetheless 9.7 per cent higher than in March 2022.
Gasoline costs were offsetting some of the pain from food and shelter, as prices dropped 13.8 per cent from a year earlier, when the war in Ukraine had caused oil prices to skyrocket essentially overnight.
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Core of the matter
Inflation data often are messy because the headline number is influenced to an outsized degree by items such as gasoline and fresh fruit, costs of which are influenced by the vagaries of international markets and the weather. So, the Bank of Canada and economists manipulate the CPI to reduce the influence of volatile items by creating “core” measures that aim to detect “underlying” inflation, or what might otherwise be described as the trend.
The Bank of Canada’s two preferred measures of core inflation slowed to about 4.5 per cent from about 4.9 per cent in February. The improvement is notable, but those figures imply that trend inflation is still elevated.
Headline inflation slowed to about 2.1 per cent when calculated as a three-month annualized rate, according to Charles St-Arnaud, chief economist at Alberta Central. That aligns with the Bank of Canada’s target of two per cent. However, the three-month average of the CPI when food and energy are removed was about 3.1 per cent, still outside the central bank’s comfort zone of one per cent to three per cent.
Macklem is paying particular attention to services prices since they are more influenced by domestic demand than the prices for goods. The services’ component of the consumer price index increased 5.1 per cent from March 2021, compared with a 5.3 per cent year-over-year increase in February.
What it means for interest rates
The Bank of Canada last week predicted that headline inflation will average 3.3 per cent in the current quarter and the sharp drop to 4.3 per cent means that projection remains on track. More important will be where we go from here: will a lower headline rate cause expectations of where prices are headed to drop, or will businesses and workers continue to base decisions on where inflation has been? More increases remain on the table.
Inflation hits lowest level since August 2021, but BoC not expected to back off yet
Story by The Canadian Press • Yesterday
OTTAWA — The Bank of Canada is expected to keep interest rates elevated for some time even as the country's annual inflation rate falls rapidly.
Inflation hits lowest level since August 2021, but BoC not expected to back off yet© Provided by The Canadian Press
Inflation in Canada dropped to 4.3 per cent in March, Statistics Canada said in its latest consumer price index report released Tuesday.
The headline rate eased from 5.2 per cent in February as higher mortgage interest costs were offset by lower energy prices.
The country's annual inflation rate is mostly tracking along the Bank of Canada's forecast of reaching three per cent by mid-year. Its preferred measures of core inflation, which the central bank uses to look through volatility in prices, also trended downward in March.
"Today's report shows that all roads do indeed point to three per cent inflation in the months ahead," said BMO chief economist Douglas Porter in a client note.
The continued slowdown in inflation since last summer has now brought the annual rate down to the lowest it’s been since August 2021.
But the Bank of Canada has said it won’t rest until inflation gets back to its two per cent target, even if the deceleration in inflation has been encouraging. That means expect interest rates to stay high for the next while.
While testifying at the House of Commons finance committee on Tuesday, governor Tiff Macklem acknowledged that the latest CPI report shows inflation is heading in the right direction.
"We are encouraged by that, but we are also seized with the importance of staying the course and restoring price stability for Canadians," Macklem told MPs.
The central bank is particularly concerned that getting from three to two per cent might take a while. According to its latest forecasts, the Bank of Canada is expecting inflation to return to its two per cent target by the end of 2024.
The central bank's concern about sticky inflation largely stems from persistently high wage growth and service price inflation.
In March, service prices were up 5.1 per cent from a year ago. Meanwhile, wages were 5.3 per cent higher than a year ago, growing at a faster pace than inflation.
In a client note on Tuesday, TD managing director and senior economist Leslie Preston said the latest data speaks to the challenges Macklem has highlighted.
"The Bank of Canada needs to remain vigilant to inflation pressures, and may need to hike again if momentum in the domestic economy does not cool as expected," Preston said.
At its last interest rate decision on April 12, Macklem addressed speculation that the central bank would move to cut rates toward the end of the year. He said that didn't look like "the most likely scenario."
Instead, the central bank has signalled interest rates may have to stay higher for longer to get there. Its key interest rate currently sits at 4.5 per cent, the highest it's been since 2007.
In the months to come, the headline rate is expected to continue to fall rapidly in part due to base-year effects. A base-year effect refers to the impact of price movements from a year ago on the calculation of the year-over-year inflation rate.
Porter said base-year effects explains part of the deceleration last month, noting March 2022 saw the fastest monthly increase in prices in three decades.
But the deceleration hasn’t brought much relief to homeowners with new mortgages or renewing their mortgages at high interest rates. Mortgage interest costs rose at the fastest pace on record last month, up 26.4 per cent from a year ago.
Grocery prices are also still rising rapidly, but at a slower pace. Grocery prices were up 9.7 per cent on a year-over-year basis in March, down from 10.6 per cent in February. Statistics Canada said the deceleration was driven by lower prices for fruits and vegetables.
Economists have long been expecting slower price increases up the food supply chain to filter down to slower prices increases at grocery stores.
"I don't think we're gonna get a lot of relief from from high prices, they just won't be rising as quickly as what we've seen over the past year," Porter said.
This report by The Canadian Press was first published April 18, 2023.
Nojoud Al Mallees, The Canadian Press
Story by The Canadian Press • Yesterday
OTTAWA — The Bank of Canada is expected to keep interest rates elevated for some time even as the country's annual inflation rate falls rapidly.
Inflation hits lowest level since August 2021, but BoC not expected to back off yet© Provided by The Canadian Press
Inflation in Canada dropped to 4.3 per cent in March, Statistics Canada said in its latest consumer price index report released Tuesday.
The headline rate eased from 5.2 per cent in February as higher mortgage interest costs were offset by lower energy prices.
The country's annual inflation rate is mostly tracking along the Bank of Canada's forecast of reaching three per cent by mid-year. Its preferred measures of core inflation, which the central bank uses to look through volatility in prices, also trended downward in March.
"Today's report shows that all roads do indeed point to three per cent inflation in the months ahead," said BMO chief economist Douglas Porter in a client note.
The continued slowdown in inflation since last summer has now brought the annual rate down to the lowest it’s been since August 2021.
But the Bank of Canada has said it won’t rest until inflation gets back to its two per cent target, even if the deceleration in inflation has been encouraging. That means expect interest rates to stay high for the next while.
While testifying at the House of Commons finance committee on Tuesday, governor Tiff Macklem acknowledged that the latest CPI report shows inflation is heading in the right direction.
"We are encouraged by that, but we are also seized with the importance of staying the course and restoring price stability for Canadians," Macklem told MPs.
The central bank is particularly concerned that getting from three to two per cent might take a while. According to its latest forecasts, the Bank of Canada is expecting inflation to return to its two per cent target by the end of 2024.
The central bank's concern about sticky inflation largely stems from persistently high wage growth and service price inflation.
In March, service prices were up 5.1 per cent from a year ago. Meanwhile, wages were 5.3 per cent higher than a year ago, growing at a faster pace than inflation.
In a client note on Tuesday, TD managing director and senior economist Leslie Preston said the latest data speaks to the challenges Macklem has highlighted.
"The Bank of Canada needs to remain vigilant to inflation pressures, and may need to hike again if momentum in the domestic economy does not cool as expected," Preston said.
At its last interest rate decision on April 12, Macklem addressed speculation that the central bank would move to cut rates toward the end of the year. He said that didn't look like "the most likely scenario."
Instead, the central bank has signalled interest rates may have to stay higher for longer to get there. Its key interest rate currently sits at 4.5 per cent, the highest it's been since 2007.
In the months to come, the headline rate is expected to continue to fall rapidly in part due to base-year effects. A base-year effect refers to the impact of price movements from a year ago on the calculation of the year-over-year inflation rate.
Porter said base-year effects explains part of the deceleration last month, noting March 2022 saw the fastest monthly increase in prices in three decades.
But the deceleration hasn’t brought much relief to homeowners with new mortgages or renewing their mortgages at high interest rates. Mortgage interest costs rose at the fastest pace on record last month, up 26.4 per cent from a year ago.
Grocery prices are also still rising rapidly, but at a slower pace. Grocery prices were up 9.7 per cent on a year-over-year basis in March, down from 10.6 per cent in February. Statistics Canada said the deceleration was driven by lower prices for fruits and vegetables.
Economists have long been expecting slower price increases up the food supply chain to filter down to slower prices increases at grocery stores.
"I don't think we're gonna get a lot of relief from from high prices, they just won't be rising as quickly as what we've seen over the past year," Porter said.
This report by The Canadian Press was first published April 18, 2023.
Nojoud Al Mallees, The Canadian Press
Getting inflation below 3% won't be easy: Frances Donald
Story by Larysa Harapyn • Yesterday
Frances Donald, chief economist at Manulife Investment Management, talks with Financial Posts Larysa Harapyn about how getting below three per cent inflation wont be easy.
Story by Larysa Harapyn • Yesterday
Frances Donald, chief economist at Manulife Investment Management, talks with Financial Posts Larysa Harapyn about how getting below three per cent inflation wont be easy.
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