Canada's CPI increased last month, but June rate cut is still on the cards

Despite rise in headline inflation, the BoC's preferred measure is looking good

Canada's CPI increased last month, but June rate cut is still on the cards
Steve Randall

Canada’s consumer price index increased in March, rising 2.9% year-over-year compared to the 2.8% rise in the previous month.

But while headline inflation may fuel concerns that interest rate cuts could be pushed further down the road, digging into the data from Statistics Canada shows that the CPI rise was driven by gasoline last month (4.5%) – without which the gain would be 2.8%, lower than February’s 2.9% gasoline-excluded rate.

And overall, the CPI gains are not being driven by broad price rises, but by shelter costs with mortgage and rent payments having the largest impact on the all-items year-over-year index (6.5%), although the mortgage interest cost index rose 25.4% on a year-over-year basis in March, slower than the 26.3% increase in February. Rents were up 8.5% last month compared to 8.2% in February.

Rent payments along with air transportation also drove the 4.5% year-over-year rise for services in March (up from 4.2% in February) while goods slowed to a 1.1% yearly rate (down from 1.2% in February).

Economists’ view

Economists from Canada’s big banks have reacted the CPI print and how it might impact interest rate cuts.

“March’s reading today confirmed that broad-based easing in price pressures in Canada are indeed underway,” said Claire Fan at RBC Economics. “Different measures of core inflation all continued to decelerate and the diffusion index that measures the scope of inflation pressures also improved again and now tracks a breadth of price pressure that’s similar to pre-pandemic.”

RBC Economics still expects a June rate cut, along with CIBC Capital Markets.  

“Inflationary pressures in Canada remain weaker and more concentrated in specific areas (shelter) than in the US, which makes sense given weaker consumer spending here,” CIBC’s Andrew Grantham commented. “That should justify a first interest rate cut from the Bank of Canada in June, provided the next CPI release doesn't show a sizeable reacceleration in core measures.”

However, others are less certain.

“The Bank of Canada’s preferred core inflation gauges were soft again in the month of March. At the margin, that slightly added to June cut pricing,” said Scotiabank’s Derek Holt. “That’s welcome news after all that Canadians have been through. But we still need much more evidence. The core question of whether this is a durable soft patch remains open in my opinion.”

And Leslie Preston at TD Economics also thinks the BoC will remain cautious.

“With inflation still at the top of the BoC's range, we expect the bank will want to see a bit more confirmation before taking rates lower and lean towards a July cut,” she said. “However, if the numbers continue to soften by more than we are expecting, risks are tilted towards an earlier move.