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Canada’s annual inflation rate ticked up to 4.4% in April, as higher shelter costs contributed to the first acceleration in the consumer price index in 11 months. The reading surprised the Street, which was looking for a further easing in the rate of inflation after it hit a peak of 8.1% last June.

Analysts polled by Reuters had expected annual inflation rate to edge down to 4.1% from 4.3% in March. Month-over-month, the consumer price index was up 0.7%, higher than the forecast 0.4% gain.

It was the first time since June 2022 that the annual inflation reading came in hotter than economists were expecting, according to National Bank Financial.

Expressed at an annualized rate, the three-month change in core inflation – excluding food and energy – was 4.2 per cent in April, up from 3.1 per cent in March.

The Canadian dollar spiked about two-tenths of a cent on the inflation report, while the Canadian 2-year bond yield - which is particularly sensitive to changes in central bank policy - rose about 10 basis points from prior to the data, to 3.89%.

Interest rate probabilities based on trading in swaps markets have now completely priced out Bank of Canada rate cuts this year. Prior to the data, they were giving about even odds of a 25 basis point cut and no rate moves at all by the end of this year.

Market positioning, however, also suggests traders see only modest odds that the bank will be hiking rates any further this year.

Here’s how money markets were pricing in further moves in the Bank of Canada overnight rate just prior to the 830 am ET data, according to Refinitiv Eikon data. The current Bank of Canada overnight rate is 4.5%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing.

Meeting DateImplied RateBasis Points

And here’s how this market position shifted after the inflation data hit.

Meeting DateImplied RateBasis Points

By comparison, money markets are still pricing in at least two quarter-point rate cuts by the U.S. Federal Reserve by the end of this year.

Economists are cautioning that rate cuts in Canada are beginning to look increasingly unlikely for this year. Here’s how they are reacting to the inflation report:

David Rosenberg, founder of Rosenberg Research

The core CPI (ex-food and energy) was okay, coming in at +0.3% for the third month in a row, and while clearly off last year’s boil, it likely is still running a little too high for the BoC’s liking. I am sure Tiff Macklem’s patience is running thin, and while a June hike is still a low odds event, July is not if we don’t see better numbers than what we just saw. The next policy meeting comes two days before the next jobs report (June 7th for the former and June 9th for the latter) and any strength in that figure will likely tip the scales for the BoC to move off the sidelines. While the trend in underlying inflation is cooling, at +4.2% (was +4.4% in March but the consensus was +4.1%), this is still double the trend that the Bank is aiming for. And the central bank has been very clear that the risk of elevated inflation at the headline core level lasting longer risks having inflation become increasingly embedded in expectations.

If there was just a sprinkle of encouraging news in the report, it was that the six-month trend on the core CPI is running at a +3.6% annual rate, so the momentum is squarely downward. But is it subsiding quickly enough? That is the key issue, And the trimmed-mean index has slowed for five months running, dipping to 4.2% YoY from 4.4% and the softest (for lack of a better term) since January 2022. One area that will be the key to whether the disinflation momentum can gather steam will be the still-hot shelter components — the rent measure is up more than 6% YoY but as we saw in the housing start data, we are starting to get a vigorous supply response in the multi-family space. And the upward pressure from mortgage costs (+28.5% YoY) should help play a role too now with interest rates having been on hold these past few months.

Royce Mendes, managing director & head of macro strategy at Desjardins Capital Markets

The slowdown in Canadian inflation is looking like it might have been a false dawn. ... Both food and energy price growth eclipsed our forecasts for April. Excluding food and energy, prices were up 0.3% in seasonally-adjusted terms. ...

Both of the Bank of Canada’s core measures accelerated in three-month annualized terms. The pace of trim now stands at 3.7%, while median is running at 3.8%, up from 3.3% and 3.7%, respectively. The newly minted core services excluding shelter metric remained roughly unchanged in three-month annualized terms at 4.5%. All of those remain well above the Bank of Canada’s 2% target. ...

Today’s numbers suggest that core inflation is proving to be more sticky than anticipated. While one data point won’t completely change the minds of central bankers, there’s growing evidence that further rate hikes might be necessary. We’ll be watching the upcoming quarterly GDP and monthly employment prints very closely for signs that monetary conditions are not yet tight enough to return inflation to target. But it’s safe to say the tightrope being traversed by central bankers just became more difficult to navigate.

Stephen Brown, deputy chief North America economist, Capital Economics

A step backward. The renewed acceleration in the monthly changes in CPI-trim and CPI-median in April, combined with the recent rapid turnaround in the housing market, leaves us doubting our view that the Bank of Canada will be ready to cut interest rates as soon as October. ...

The big disappointment is that the monthly changes in the CPI-trim and CPI-median measures of core inflation accelerated to 0.4%, from an average of 0.3% in March. Granted, that left the average three-month annualized rate at 3.7%, no higher than it was two months earlier, and the annual rates of both declined to an average of 4.2%, from 4.5%. But with Governor Tiff Macklem recently stressing that getting inflation down from 3% (where it is likely to be by the summer) to 2% will be the hard part, the April CPI data mean we still can’t take further interest rate hikes off the table and present a clear risk to our current forecast that the Bank will be ready to cut interest rates by October.

Jay Zhao-Murray, forex analyst, Monex Canada (a commercial foreign exchange specialist)

While stronger inflation for all items will be a less-than-welcome sight for the Bank of Canada’s top officials, the fact that price pressures have also risen in the metrics that they’ve highlighted as their preferred measures of core makes today’s report considerably worse. These measures—the 3-month annualized averages of CPI-median and CPI-trim—rose from 3.6% to 4.0% and 3.3% to 3.7%, respectively. As the Bank’s recent communications have placed an explicit focus on the upside risks to inflation, expressed worries about core inflation becoming stuck above 3%, and left the door open to future hikes if warranted by the data, we believe that markets are underpricing the risk of an additional insurance hike on June 7th.

Currently, the market-implied odds of a June hike sit at 34%, repriced up from 17% just prior to the report. Today’s CPI report, which was the final piece of high-impact data ahead of the next BoC decision, compounds the evidence we received earlier this month to suggest that the Canadian economy is heating back up. For instance, job growth was twice as strong as economists had anticipated, while the housing market appears to have bottomed, with housing starts, building permits, home prices and sales volumes all surging.

Looking deeper into the report, we see that almost all major components rose faster than the pace consistent with 2% inflation. Even the two weakest components, recreation, education, and reading (+0.2% MoM) and alcohol, tobacco, and cannabis (+0.2% MoM), merely tracked in line with that pace; none were weaker. The single greatest contributor to inflation was gasoline (+6.3%), a notoriously volatile series, but even after stripping out its effects, prices rose by 0.5% in April, which would annualize to 6.2% if maintained over 12 consecutive months. At the risk of understating the facts, this is not consistent with the Bank’s 2% inflation target. The rise in gasoline prices wasn’t even the only reason for the 1.5% increase in transportation costs, as the cost of operating a vehicle jumped by 2.9% in April. ...

In a global context, the latest increase in headline and core inflation metrics will draw the attention of investors and traders as it is the first time this has happened within G10 economies for some time. Furthermore, it has occurred in Canada where interest rates are the joint-third highest among G10 economies, the central bank was one of the first to call and end to its hiking cycle, the transmission of monetary policy is deemed to be fairly quick given the domestic housing market’s high leverage ratios, and the headline inflation rate is the lowest outside of Switzerland and Japan. While this definitely plays into the hands of those analysts suggesting that inflation is likely to remain structurally above 2% given the shocks to the global economy and those asserting that further loosening in the labour market is required for inflation to fall from 4% back to target, we think it is too soon to make any clear connection. However, the signs for the BoC are definitely concerning. Given the breadth of inflation pressures, the uptick in their preferred measures of the momentum in core inflation, and evidence that the housing market is bottoming out and the labour market is still showing signs of strength, the Bank of Canada may be forced to deliver an insurance rate hike at their June meeting.

Derek Holt, vice-president, Scotiabank Economics

At the heart of the matter is the need to look at the figures in the correct way by examining core price pressures in the highest frequency manner possible and by considering the breadth of price pressures. ....They are all running at a four-handled pace. Traditional core CPI was up by 4.2% m/m SAAR [Seasonally Adjusted Annual Rate]. Weighted median CPI was up by 4.8%. Trimmed mean CPI was up by 4.9%. Even headline all-in CPI was up by 7.2% m/m SAAR.

These measures suggest that inflation continues to run far above the BoC’s 2% headline target. Core inflation ebbed from the peak rates early last year, but these preferred measures have been remarkably sticky since then.

Breadth to even the year-over-year rates remains exceptionally high. 67% of the CPI basket continues to increase by over 3% y/y. 59% of the basket continues to rise by over 4%. 44% of the basket is still rising by over 5%. ...

Furthermore, I continue to think that Canadian core inflation is at an inflection point toward persistently higher inflation risk. No material progress is being made to open up disinflationary slack in the economy or labour market. .... Housing is on a tear again which is directionally consistent with arguments I’ve given for why this would happen and why consensus was too bearish toward housing dating back to last year. ... Wage pressures remain well in excess of Canada’s moribund performance on labour productivity. Collective bargaining is putting upward pressure on wage settlements and setting wage gains above the 2% target for years to come. The BoC’s measures of inflation expectations continue to indicate pressures well above the 2% inflation target for years to come.

The broad macro backdrop has a number of supporting arguments that can drive resilience. There isn’t enough evidence that domestic lending conditions are tightening rapidly or significantly enough to do the BoC’s work at the margin. Apparently folks are able to get the requisite mortgages!

Overall, recent data has reinforced the narrative that I have been communicating to clients throughout this year that the Bank of Canada’s job is not finished after it quit hiking too early back in January. There is a highly compelling case for returning with a hike at the June meeting and if not then July’s odds go up. I would assign high market probability to a June hike with info to this point.

Robert Kavcic, senior economist, BMO Capital Markets

Tuesday’s headlines are no doubt grabbing onto the fact that Canada’s inflation rate is accelerating again. The headline inflation rate rose a tick to 4.4% y/y, ending a run of lower readings. Before freaking out, let’s keep in mind that last April was a tough comparison (i.e., prices were up only modestly), while last May saw a chunky 1.4% monthly increase. In other words, that upward move in the headline inflation rate will likely prove fleeting once we get the May numbers. That said, we’re also dealing with the reality that underlying measures of core inflation are settling in around 4% annualized in recent months. That is where headline inflation tends to gravitate, barring major swings in things like gas and food prices. At the end of the day, if inflation indeed settles around 4%, the BoC is going to have to judge if 4.5% policy rates (i.e., slightly positive in real terms) is tight enough.

Avery Shenfeld, managing director and chief economist of CIBC Capital Markets

The data were firmer than we expected for food and for prices excluding food/energy, leading to a higher headline gain. While that’s a setback in terms of getting to 2%, we still see enough braking forces acting on economic growth, both in Canada and abroad, to turn the CPI in the right direction. But a lot of our forecast for no further rate hikes in Canada now rests on seeing labour market slack starting to open up, and we might have to revisit that forecast should that fail to be the case in upcoming months. The data do underscore our persistent warnings that chatter about rate cuts in 2023, not only in Canada but in the US, is misplaced. Both countries need to go through some economic pain to get inflation to 2%, as today’s data reminded us, so rate cuts are off the table until we gone through a few weak quarters.

Leslie Preston, managing eirector & senior economist, TD Economics

Headline inflation took a breather on it’s trek down the mountain in April thanks to surging gasoline prices. We expect the pause will be temporary and inflation will resume heading lower in the months ahead. As outlined in our March forecast, we expect core inflation to continue to decelerate below 3% y/y in the second half of the year, as does the Bank of Canada.

Cooler inflation for demand-sensitive services inflation, or “supercore” was the most encouraging development of the report, even though it was somewhat offset by hotter inflation for goods. This reinforces the challenge Governor Macklem has talked about in bringing inflation all the way back to 2%. This suggests that the BoC needs to remain vigilant to inflation pressures, and may need to hike again if momentum in the domestic economy does not cool as expected.

Matthieu Arseneau and Alexandra Ducharme, economists at National Bank Financial

While April’s data is disappointing, there is still good news for the coming months. Gasoline prices are falling so far in May, which should contribute to a large moderation in annual inflation next month especially as favorable base effects occur in May and June. Indeed, the months of high inflation following the start of the war in Ukraine will be removed from the calculations, and the negative base effect will disappear from the year-over-year changes. While this morning’s numbers will likely put the central bank on guard, it does not mean that interest rate hikes should be resumed right away. According to our current inflation forecast, real interest rates will be above 1.0% in June, the most restrictive rates in 15 years. Such a restrictive monetary policy should be sufficient to significantly calm the Canadian economy in the coming quarters and, as a result, cool inflation.