Market Wire - Faster-Than-Expected Price Growth Lifts Loonie

Karl Schamotta, Chief Market Strategist: karl.schamotta@corpay.com

Canadian price growth remained extremely elevated last month, making a 50-basis point interest rate increase highly likely at the Bank of Canada’s next meeting in June. Although prices climbed more slowly month-over-month, up 0.6 percent in April after a 1.4 percent gain in March, data released by Statistics Canada this morning showed the Consumer Price Index climbed 6.8 percent on a year-over-year basis in April. This beat last month’s increase, again marking the fastest increase since January 1991, when the Mulroney government implemented its Goods and Services Tax. 

Gasoline prices slipped slightly, falling -0.7 percent month-over-month after an 11.8 percent gain in March. 

Shelter costs rose 7.4% year over year, the fastest pace since June 1983, with the homeowners' replacement cost index (a proxy for new home prices) up 13.0 percent - despite a slight 0.2 percent increase in mortgage costs. Food prices were up 8.5 percent relative to last year. 

Consumer spending patterns shifted slightly, wit  tangible product prices up 0.4 percent month-over-month, while services climbed 0.7 percent.

Core inflation, computed as the average of the three price measures preferred by the Bank of Canada (trim, median, and common), increased an annualized 4.23 percent - the highest in at least three decades. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

Markets expected headline prices to rise 6.7 percent, with core prices seen increasing 5.4 percent. The Canadian dollar crept upward as yields moved higher. Investors expect the Bank of Canada to hike benchmark interest rates at least eight times by the end of the year.

In markets more broadly, US 10-year yields are holding ground and the dollar is trading on a stronger footing after Federal Reserve chair Jerome Powell ratcheted up the hawkish rhetoric during yesterday’s Wall Street Journal event. “What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that,” he said, “If that involves moving past broadly understood levels of ‘neutral,’ we won’t hesitate at all to do that.”  

With energy prices climbing again, the euro is unwinding gains achieved yesterday, when Governing Council member Klaas Knot suggested a half-point rate hike could be on the table when the European Central Bank meets in July.