By Robb M. Stewart
OTTAWA--The pace of inflation in Canada decelerated to its slowest in three years last month, with underlying measures of core price pressures showing further progress and heightening the odds the central bank will pivot to cutting interest rates as soon as early June.
The consumer-price index, a measure of goods and services prices across the economy, rose 0.5% in April from the month before and by 2.7% on an annual basis, Statistics Canada said Tuesday. That was in line with the consensus forecast of economists and follows March's tick higher to 2.9%.
Two core CPI indicators preferred by the Bank of Canada, median and trimmed mean, on average edged up 0.1% month-over-month for a fourth consecutive month and cooled from a year earlier to 2.75%, the lowest since June 2021.
That heightened market expectations that rates will be cut next month, with bond yields and the Canadian dollar slipping modestly to price in a roughly 60% chance of a one-quarter-percentage-point drop in the central bank's policy rate where the odds a week ago suggested an about 40% likelihood following data pointing to a surprise surge in employment in April.
Still, there remain some doubts the Bank of Canada will be ready to act, given lingering resilience in the economy and a reacceleration in the median and trim CPI on a three-month annualized basis to 1.5% and 1.8%, respectively. That will put added weight on retail sales figures out late this week and gross domestic product data due at the end of the month, the latest of the major indicators the Bank of Canada's governing council will collect before the next rate decision June 5.
"At this point, the decision seems like a coin toss," said Olivia Cross, North America economist at research firm Capital Economics, who sees a chance the Bank of Canada will hold off cutting to confirm lower core inflation with two further inflation reports ahead of its July meeting.
The biggest drivers of consumer price growth last month continued to be mortgage interest costs and rent following the central bank's aggressive monetary policy tightening into last year, as well as a further jump in prices at the pump for the month, though this was countered by decelerating food prices.
Bank of Canada policymakers have debated just how much more proof they need to be confident inflation is sustainably tracking back to their 2% target, but have said a first cut to interest rates is approaching. It has projected inflation will ease below 2.5% only in the second half of this year and return to target in 2025. A surge in hiring in April pointed to lingering resilience in the labor market that could afford the bank more time as policymakers wait for evidence of a sustained easing in inflation.
Inflation in Canada has subsided considerably from the 40-year high of 8.1% reached in 2022 after the central bank boosted its policy interest rate to a more than two-decade high of 5%, where it has remained since last July. In a speech to lawmakers earlier this month, Gov. Tiff Macklem assured them a rate cut was getting closer but said that while progress on core inflation has become clearer there remained risks if housing prices rise faster than expected, wage growth stays high relative to productivity or global tensions escalate.
Canadians continued to pay more for food last month, though growth in prices at stores eased to 1.4% from March's 1.9%, largely due to a year-ago jump in meat prices, while food prices at restaurants also eased on a yearly basis, rising 4.3% following 5.1% growth in March.
Still, consumers paid 6.1% more for gasoline in April following a 4.5% increase the month before, which the data agency said reflected higher costs associated with switching to summer blends of fuel, high oil prices, and an increase in the federal government's carbon levy.
"We believe that the door is open for a Bank of Canada rate cut, and we have been leaning to a June move for the past six months. But it remains a close call and when the bank does eventually move, it will be gradual," said Douglas Porter, chief economist at Bank of Montreal.
While the next policy meeting may be a close call, some economists argue continued disinflation in April and an expansion of the number of CPI components now showing signs of cooling offer enough evidence for the Bank of Canada to cut in June rather than continue to wait.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
05-21-24 1148ET
