Market Wire: Canadian Inflation Slows as Expected, Helping Justify Bank of Canada Pause

Canadian inflation continued to slow in March, and a number of underlying price indicators eased further, giving the Bank of Canada room to sit on the sidelines for longer. Data released by Statistics Canada this morning showed the Consumer Price Index rising 4.3 percent on a year-over-year basis in March, decelerating sharply from the 5.2 percent increase recorded in February, and exactly in line with consensus expectations. On a month-over-month basis, the change climbed to 0.5 percent - precisely meeting market forecasts.

Gasoline prices fell -13.8 percent year-over-year, driving the energy sub-index to a -6.9percent decline - the second negative print since January last year. Food prices slowed their climb, up 8.9 percent year-over-year, with gains decelerating from the prior month’s 9.7-percent increase as supply issues were resolved and weather conditions improved.

Shelter costs decelerated for a fourth month, up 5.4 percent year-over-year, down from February’s 6.1-percent pace as rate hikes hit the housing market. Mortgage interest costs surged 26.4 percent from the prior year, even as the homeowners' replacement cost index—a proxy for home prices—continued to lose momentum, up just 1.7 percent year-over-year.

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 4.5 percent over the same period last year, down from 4.85 percent in the prior month. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

Markets overwhelmingly expect the Bank of Canada to remain on hold for now (with cuts coming later in the year), meaning that today’s numbers are unlikely to drive a meaningful reaction in currency markets. Rate differentials should remain firmly tilted against the loonie, even as other factors—elevated commodity prices, still-hot US demand, and a declining dollar—argue for currency appreciation in the short term.