Canadian Inflation Slows to 4.3%, Backing Interest-Rate Pause

Inflation drifted lower to the slowest pace in nearly two years, a reprieve for the Bank of Canada amid a jobs market and economy that continue to defy expectations for a stall.

(Bloomberg) — Inflation drifted lower to the slowest pace in nearly two years, a reprieve for the Bank of Canada amid a jobs market and economy that continue to defy expectations for a stall.

The consumer price index rose 4.3% in March from a year ago, the lowest headline number since August 2021, Statistics Canada reported Tuesday in Ottawa. That matched expectations in a Bloomberg survey of economists and was down from 5.2% in February.

On a monthly basis, the index rose 0.5% in March, also matching economist forecasts.

Two key yearly measures tracked closely by the central bank — the so-called trim and median core rates — also dropped, averaging 4.5%, in line with forecasts.

A three-month moving average of the measures that policymakers have flagged as key to their thinking fell to an annualized pace of 3.43%, from 3.54% previously, according to Bloomberg calculations.

The figures reaffirm inflation in Canada is decelerating sharply this year, supporting the Bank of Canada’s decision to pause its tightening campaign even as the economy proves largely resilient after rapid increases to borrowing costs. Last week, Governor Tiff Macklem and his officials left interest rates unchanged at 4.5% for the second straight meeting, saying recent data is reinforcing its confidence that inflation will continue to slow.

“We have to imagine the BoC is content with today’s data release,” Andrew Kelvin and Robert Both, strategists with Toronto-Dominion Bank’s securities unit, said in a report to investors. “Even with inflation evolving in-line with the BoC’s forecast, markets are still holding a modest tightening bias for the next three meetings.”

Bonds and the loonie were little changed after the release.

Policymakers expect consumer price gains will slow to 3% around midyear and return to near their 2% target by the end of 2024. But they said getting the prices all the way back to 2% could prove more difficult because inflation expectations are coming down slowly, and service prices and wage growth remain elevated.

Macklem and Senior Deputy Governor Carolyn Rogers will have an opportunity to address the data on Tuesday when they face lawmakers on the House of Commons finance committee at 11:30 a.m. in Ottawa.

Last week, Macklem also pushed back on market expectations for an interest rate cut, reiterating that it was “far too early” to be talking about easing monetary policy. Overnight swaps traders are now betting the central bank won’t start cutting until next year, and are again pricing a chance of a hike in 2023.

Another closely watched indicator, service inflation, slowed to 5.1% in March. But in a sign wage pressures could be picking up, more than 155,000 federal workers are set to go on strike starting Wednesday if no deal is reached on their talks with Prime Minister Justin Trudeau’s government by Tuesday night.

To be sure, the Bank of Canada’s core measures ticked up on the month, a potential sign of stickiness.

While much of the headline decline in March is coming from lower energy prices and favorable base-year effects, both grocery prices and homeowners’ replacement cost increased at a slower pace.

In March, gasoline prices dropped for the second straight month, down 13.8% in the largest yearly decline since July 2020. Price growth for durable goods also slowed, with furniture prices leading the deceleration largely on base-year effects.

Homeowners’ replacement cost continued to slow, rising 1.7% from a year ago. In contrast, mortgage interest costs rose at a faster rate, jumping 26.4% — the largest yearly increase on record as Canadians continued to renew and initiate loans at higher interest rates.

 

–With assistance from Erik Hertzberg.

(Updates with economist reaction and sets up Macklem testimony.)

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