Canada’s inflation rate dropped to 4.3% in March on an annual basis from 5.4% in the prior month, driven largely by comparisons to the surging energy and food prices of a year ago, according to data released by Statistics Canada on Tuesday.
While disinflation was expected as the Bank of Canada moved aggressively with its rate hikes—March’s top-line number was the lowest since August 2021—the important question is whether inflation will reach the central bank’s target rate of around 2% this year.
We don’t think that is the case given how sticky some components of the consumer price index have been. Excluding the most volatile components like energy, the trimmed-mean and median inflation measures posted more modest declines to 4.4% and 4.6% in March, respectively. February’s numbers were 4.8% and 4.9%.
Taking out the base effects by looking at the month-over-month data, core inflation also remained quite sticky compared to the overall inflation number. Core inflation, excluding food and energy, rose by 0.3% from a month ago in back-to-back months on a seasonally adjusted basis.
We think the underlying inflation is currently between 3.5% and 4%, almost double the target rate of 2%. It is unlikely that inflation will stabilize at 2% by the end of the year. A 3% rate is much more achievable.
When that outlook is considered with recent economic data on spending and jobs, we do not expect the Bank of Canada to announce rate cuts until next year. There are certainly upside risks around higher energy prices in the coming months, as OPEC+ recently announced production cuts.
There are increasing signs of a shift in sentiment from inflation as the top concern to recession as the economy continues to slow down.
While the unemployment rate remains at a historic low, we expect a recession in the second half of the year to further push the shift in sentiment as the central bank begins to reassess its monetary policy.