Canadian inflation cools to 4.3%, backing Bank of Canada rate pause

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Canada’s inflation rate is rapidly cooling this spring, a welcome development for the Bank of Canada as it holds interest rates at their highest levels in more than 15 years in a bid to restore price stability.

The Consumer Price Index (CPI) rose 4.3 per cent in March from a year earlier, down from February’s 5.2-per-cent pace, Statistics Canada reported on Tuesday. This is the lowest inflation rate since August, 2021. The slowdown was widely anticipated and matched financial analysts’ predictions.

There should be further easing in the coming months. The Bank of Canada projects inflation will ebb to around 3 per cent by the middle of the year, before returning to its 2-per-cent target rate by the end of 2024. The central bank outlined that path for inflation last week, when it decided to hold its benchmark interest rate at 4.5 per cent.

Price growth is moderating as businesses and households adjust to the fastest pace of rate hikes in decades, and as supply chains recover from significant disruptions.

Another reason for lower inflation is that the initial surge in commodity prices from when Russia invaded Ukraine is no longer part of the annual calculation of CPI growth because the invasion started more than a year ago.

Instant reaction to Canadian inflation data: markets no longer pricing in BoC rate cuts this year

But even when price increases are calculated over shorter timeframes, the trend has noticeably cooled off. Expressed at an annualized rate, the three-month change in core inflation (excluding food and energy) was 3.1 per cent in March, down from 3.4 per cent in February.

“We are encouraged with the progress so far. And seeing inflation get down to 3 per cent this summer will be welcome relief for Canadians,” Bank of Canada Governor Tiff Macklem said Tuesday in a prepared statement before the House of Commons standing committee on finance.

But Mr. Macklem has repeatedly stressed over the past week that he will not be satisfied until inflation cools to the central bank’s 2-per-cent target. He is working to push back on expectations that there will be interest-rate cuts later this year. Lower interest rates reduce the cost of borrowing, which tends to raise demand and drive up inflation.

“Let me assure Canadians that we know our job is not done until we restore price stability,” Mr. Macklem said on Tuesday.

In March, there were various areas of waning price hikes or outright drops. Gasoline prices fell nearly 14 per cent over the previous year, although they were up 1.2 per cent from February. The prices of durable goods rose 1.6 per cent in March on an annual basis, slowing from 3.4 per cent in February. Furniture has swung from recent price increases of more than 10 per cent, on an annual basis, to a 0.3-per-cent decrease in March.

There have also been slight decreases in the grocery sector: Those prices rose 9.7 per cent over the past year, down from recent hikes of more than 11 per cent.

“We expect food price inflation to come down in the months ahead, but services price inflation will take longer,” Mr. Macklem said. “Continued strong demand and the tight labour market are putting upward pressure on many services prices, and those are expected to decline only gradually.”

The price of general services rose 5.1 per cent in March from a year earlier, down from 5.3 per cent in February.

Certain aspects of the housing market are experiencing huge increases. Mortgage interest costs have surged by 26.4 per cent over the past year, rising from February’s gain of nearly 24 per cent. “This was the largest yearly increase on record as Canadians continued to renew and initiate mortgages at higher interest rates,” Statscan said in its release. Excluding these costs, the CPI rose 3.6 per cent over the past 12 months.

While inflation is continuing to subside, the The Bank of Canada has indicated that the final leg of the journey – bringing the CPI growth to 2 per cent from 3 per cent – could prove challenging. Beyond the sticky nature of services inflation, Mr. Macklem said Tuesday that inflation expectations are waning slowly, wage growth remains elevated and corporate pricing behaviour needs to moderate further.

“When you talk to companies, what you hear is, ‘Yeah, we’ve still got some cost pressures, and we’re passing those on.’ That’s because the economy is in excess demand,” Mr. Macklem explained. “When companies are not worried about losing customers, they just pass on those prices. It’s starting to normalize, but that’s something that we need to watch closely.”

Analysts have interpreted the central bank’s recent communications as fairly hawkish, meaning they believe the bank is likely to keep its benchmark interest rate at 4.5 per cent through the end of 2023, rather than lowering it. Bank officials have said they could raise rates again if they see an “accumulation of evidence” that inflation is not subsiding as expected.

Traders of interest-rate swaps, which capture market expectations for monetary policy, have recently shifted from expecting a rate cut later this year to expecting no change.

Andrew Grantham, senior economist at CIBC Capital Markets, projects that inflation will “likely stall” between 2.5 per cent and 3 per cent in the second half of this year.

“That should be low enough to prevent a further interest rate hike from the Bank of Canada, but not yet to a level at which policymakers will feel confident about easing interest rates,” he wrote in a note to clients. “We continue to expect no change in Bank of Canada policy this year before interest rate cuts begin early in 2024.”

With a report from Mark Rendell