By Robb M. Stewart
OTTAWA--Canadian inflation heated up last month as prices at the pump jumped, yet expectations that a first rate cut could come as soon as June are undimmed after closely watched measures of underlying price pressures eased each month this year.
The consumer-price index, a measure of goods and services prices across the economy, edged up 0.1 percentage point to 2.9% in March from a year earlier, Statistics Canada said Tuesday. That was in line with the advance economists had forecast. Still, measures of core inflation favored by the Bank of Canada, which aim to look past volatility in any one component, eased slightly.
A spike in gasoline prices drove the slight rise in headline inflation. Stripping that out, inflation slowed to 2.8% on a yearly basis from February's 2.9% gain. Shelter costs and services inflation broadly remain elevated, but price growth for goods has cooled. For many economists, that leaves the door open for interest rates to be lower when the central bank's governing council next meets in early June.
"Building on two prior months of CPI reports that were both downside surprises, March's reading today confirmed that broad-based easing in price pressures in Canada are indeed under way," said Royal Bank of Canada economist Claire Fan, who expects further slowing in inflation will allow for a rate cut in June.
Bond yields and the Canadian dollar fell following the release of the inflation report, and financial markets are now pricing in a roughly 65% probability of a cut in June, up from 50-50 odds previously, CIBC Capital Markets senior economist Andrew Grantham noted.
Bank of Canada Gov. Tiff Macklem has cautioned the path to taming inflation is likely to be uneven, though he has noted an easing in price pressures was becoming more broad-based. The bank, which for a sixth policy meeting in a row last week left its benchmark rate unchanged, has projected CPI inflation will be close to 3% during the first half of the year, then will ease to hit the bank's 2% inflation target next year.
Two measures of underlying inflation the central bank closely monitors cooled for a third straight month in March. Weighted median and trimmed mean CPI rose an average 2.95% last month from a year earlier compared with 3.1% growth in February. On a monthly basis, the two measures were steady with an average rise of 0.1%.
Inflation in the U.S. has remained hot in recent months and accelerated more than anticipated in March, which has some economists questioning whether the Federal Reserve will begin reducing rates this year and if some of the price pressures seen in Canada's biggest export market might work their way north.
"Inflationary pressures in Canada remain weaker and more concentrated in specific areas--shelter-than in the U.S., which makes sense given weaker consumer spending here. That should justify a first interest rate cut from the Bank of Canada in June, provided the next CPI release doesn't show a sizeable re-acceleration in core measures," Grantham said.
The advance in annual inflation in March, while expected, echoes the middle of last year when the price index similarly dipped to 2.8% in June only to bounce higher in the following months. On a month-over-month basis, inflation climbed 0.6% in March, the fastest pace since July.
The latest data showed gasoline prices increased 4.5% in March from a year earlier, after a modest 0.8% increase the month before, thanks to higher global crude oil prices. On a monthly basis, gasoline prices climbed 4.5%.
Canadians also paid more for clothing and footwear on a monthly basis, a rebound after declines in January and February that were the largest since the onset of the Covid-19 pandemic and coincided with a milder and drier winter than usual. Despite the monthly rise, clothing and footwear prices fell on last year.
Shelter costs remain the biggest driver of inflation, and as a category increased 6.5% year-over-year, the same pace as in February. Mortgage interest costs and rent prices continue to rise sharply, affected by higher interest rates.
Countering inflation, prices for telephone and internet services were down sharply from last year, natural gas costs were lower, and men's clothing prices fell.
The deceleration in core inflation measures is encouraging and the odds lean to a June move by the central bank, but there are risks to the view, said Douglas Porter, chief economist at Bank of Montreal. Gasoline prices are set to jump again in April, shelter costs remain elevated, and Porter says airfares jumped in the latest month and are back above year-ago levels following a year-long decline that had been met with skepticism.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
04-16-24 1211ET
