Consumer price inflation took a big step down in March to 4.3% year-on-year (y/y) from 5.2% in February. That is in line with market expectations.
Prices at the pump rose in March (+1.2% month-on-month (m/m) NSA), but remained well below the heights of the early days of Russia’s invasion of Ukraine (-13.8% y/y). Energy prices as a whole were down 6.9% y/y, a key downward force on headline inflation.
Food inflation cooled a bit in March, but grocery bills likely still feel onerous to Canadians paying 9.7% more versus a year ago.
Shelter inflation also moved in the right direction in March, but remained a key source of inflation, up 5.4% y/y in March. Mortgage interest costs are up 26.4% versus a year ago in March, up from 23.9% in February. The cooling in the housing market as a result of higher mortgage rates has pushed homeowners’ replacement costs down to only 1.7% y/y, down from nearly 15% in late 2021.
Goods inflation is decelerating faster than services. Inflation for durable goods decelerated from 3.4% y/y in February (and nearly 8% y/y last year) to 1.6% in March, as prices for furniture fell. Whereas services inflation remained above 5% in March, where it has been for nearly a year. Zeroing in on our measure of “supercore” inflation, which is a measure of demand-sensitive services prices, it ticked up slightly to 6.3% from 6.2% in February. One upward price move on the goods side was clothing prices, which were up 2.4% y/y in March, from 1.9% y/y in February.
The Bank of Canada’s underlying inflation pressures cooled modestly in March. CPI-trim eased to 4.4% y/y (4.8% in Feb.) and CPI-median at 4.6% y/y (4.9% in Feb.).
Key Implications
Inflation continued to move in the right direction in March, supporting the Bank of Canada’s stand pat rate decision last week. As outlined in our recent 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.
However, the persistently high level of demand-sensitive services inflation, or “supercore”, speaks to the challenge Governor Macklem talked about last week 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.
