Highlights:
- The year-over-year rate of headline CPI inflation was unchanged at 1.6% in April.
- Expectations were for a modest rise to 1.7%, matching the Bank of Canada’s Q2 forecast.
- Energy price inflation picked up slightly to 9.6% year-over-year as higher gasoline prices continued to put upward pressure on headline inflation.
- Food prices remained a source of downward pressure, though less so than in recent months as the most significant period of food price deflation in 25 years is gradually coming to a close.
- Prices excluding food and energy were up just 1.5% from last April, the slowest rate in nearly three years.
- The BoC’s core measures averaged 1.4%, down from 1.5% in March. Both CPI-trim and CPI-median have fallen by 0.3 ppts since the start of the year while CPI-Common is little changed.
Our Take:
The expected rise in headline inflation did not materialize as a more modest pace of core inflation fully offset a further increase in energy prices and some easing in food price deflation. Underlying inflation has clearly moderated so far this year—two of the Bank of Canada’s three core measures have declined, ex-food and energy inflation has slipped lower, and a diffusion index shows just 40% of CPI components are rising at 2% or faster, down from close to 50% two months ago. Softer inflation is surprising given strong economic growth in recent quarters, though a similar pattern is being seen in the labour market where robust job gains and a lower unemployment rate have been accompanied by slowing wage growth. Both inflation and wages seem to reinforce the Bank of Canada’s view that the economy has more room to run before inflationary pressure builds, and if anything, the recent dip in inflation might be seen as evidence that slack is slightly greater than their current estimate. Along with concerns surrounding the outlook for trade and investment, today’s inflation report will lend support to the Bank maintaining a cautious tone in their policy announcement next week, which we think will reinforce market expectations that a rate hike is unlikely this year.
