indicatorThe Owl

Another swallow?

Core inflation moving in the right direction

By Mark Parsons, ATB Economics 16 April 2024 2 min read

Last Wednesday, Tiff Macklem said the Bank of Canada is getting more confident inflation is heading in the right direction.

They just want to see more data to be convinced. Or in the words of Governor Macklem, “We're seeing what we need to see. We just need to see it for longer”. 

In other words, one swallow doesn’t make a summer, but maybe a couple more could.

Less than a week later, we now have another month of data, and it looks pretty good overall.

Yes, the headline annual inflation rate rose from 2.8% in February to 2.9% in March.  But that was expected because of higher gasoline prices. Consumer prices excluding gasoline decelerated 0.1 points to 2.8% year-over-year (y/y).

The real progress came from trend or core inflation, which strips out some of the more volatile movements.

The trim measure of core prices eased 0.1 points to 3.1% y/y and the median measure dipped 0.2 points to 2.8% y/y. More importantly, annualized changes in the 3-month moving average, which strips out base year effects, are now below 2% for both measures. 

Shelter remains the key source of inflation, rising +6.5% y/y. Mortgage interest costs remain a big driver, adding nearly a percentage point to headline inflation (excluding mortgage costs CPI inflation was 2%). This effect will dissipate as rates shift lower. Rent inflation (+8.5% y/y) remains high and will likely prove more durable due to ongoing housing supply issues.

Food prices are very elevated, but they continue to rise at a slower annual rate. In March, the increase was 3.0% y/y. 

So the burning question - is this enough to cut in June? On its own, probably not. But we do get another inflation print next month, and that could be the deciding factor. Either way, we are getting close.  

We still think that the easing core inflation trend (if it holds), along with recent cracks in the labour market, would be enough for the Bank of Canada to justify rate cuts in June. But we wouldn’t be surprised if the Bank waits to cut in July to buy more time (and gather more data) and announce alongside a new set of projections.

In Alberta, the annual inflation rate eased from 4.2% to 3.5%, but remained above the national average due to faster growing energy prices. 

Electricity prices continued to put upward pressure on headline inflation in Alberta, although the impact is fading. The 26% y/y increase was entirely due to base period effects, as $25 rebates and a rate cap of 13.5 cents kw/h were in place in March 2023. On a month-over-month basis, electricity prices have declined the last three months, and should soon  start subtracting from the annual inflation rate.

Gasoline prices (up 10.4% y/y) added more to annual inflation in Alberta than nationally (up 4.5% y/y), with the partial reinstatement of the fuel tax starting January 1 likely a contributing factor. Natural gas prices fell between February and March, but remained 11% higher than a year ago due to low prices in March 2023.

Excluding energy and food prices, Alberta’s annual core inflation rate was 2.5% - below the national rate of 2.9%.

Answer to the previous trivia question: The first Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to Ragnar Frisch and Jan Tinbergen in 1969.

Today’s trivia question: Who is credited with implementing the first modern “welfare state?”

The national inflation rate stood at 2.9% in March while it came in at 3.5% for Alberta

The national inflation rate stood at 2.9% in March while it came in at 3.5% for Alberta

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