- The Canadian Consumer Price Index (CPI) jumped to 2.2% year-on-year (y/y) in March, up sharply from 1.1% in February, but below the median forecast for 2.3%. Gasoline prices were the main story. Compared to the lows year ago, the price at the pumps was up a whopping 35.3%. Other energy prices were also higher relative to a year ago. Excluding energy, inflation would have been much softer at 1.1% (from 1.0% in February).
- Seasonally adjusted, the price index rose a mild 0.1% month-on-month, the same as in February. Among major categories, price growth was led by shelter, which rose 0.8% on the month and is up 2.4% from a year ago. Shelter costs are being driven higher by homeowners replacement costs (+7.7% y/y), but offset by falling mortgage interest costs (-6.3%). Inflation was muted elsewhere.
- The Bank of Canada’s core inflation measures all ticked up in March, CPI-common rose to 1.5% (from 1.3%), CPI-trim to 2.2% (from 2.0%), and CPI-median to 2.1% (from 2.0%). Taken together, the measures averaged 1.9% on the month (up from 1.8% in February).
Key Implications
- You’ve probably heard a lot of “base effects” over the past little while. With respect to inflation, this refers to the jump in the year-on-year metric due to the comparison to the depressed level a year ago. It’s not going away, at least not yet. The plummet in energy prices was short lived but deep at the outset of the pandemic, and its recovery is now adding over a percentage point to inflation.
- For many Canadians, inflation doesn’t feel quite as weak as the news would suggest. The CPI index does not fully account for changes in the consumption patterns of Canadians during the pandemic. Canadians have shifted consumption toward shelter, which has been increasing in price, and away from clothing and recreation, which has fallen. In February, the adjusted consumption basket showed a rate of inflation 0.4 percentage points above the official rate, and the numbers are likely similar this month.
- The Bank of Canada aims to skate where the puck is going. It will look through the volatility in the headline, but will be watching for signs of bubbling core price pressures as the economy moves back to normal. The Bank will release new forecasts for inflation, as well as economic growth in its Monetary Policy Report to be released later this morning. We expect an upgrade to both measures, which suggests a shift in forward guidance for monetary policy may also be warranted. Stay tuned.
