Getting there

In line with market expectations, Canada's inflation rate slowed sharply on a year-on-year basis in March. Headline CPI rose 0.5 percent month-on-month, albeit only 0.1 percent on a seasonally adjusted basis.  However, the March 2022 jump of 1.4 percent (in the immediate aftermath of the Russian invasion of Ukraine) fell out of the year-on-year calculation, producing a powerful base effect. As a result, the year-on-year rise in March was 4.3 percent, down from 5.2 percent in February, representing the smallest rise since August 2021. As an aside, the fact that the August 2021 figure was 4.1 percent is a useful reminder that inflation was running well ahead of the Bank of Canada's 2 percent target long before the Ukraine invasion occurred. 

Two of the most widely-followed sub-indices, for food and gasoline, both contributed to the slowdown in headline inflation in March. Gasoline prices were 13.8 percent lower than a year ago, though a recent uptick in pump prices after OPEC's output cuts suggests that this will not be repeated in the April data.  Grocery prices, the subject of much political posturing in recent weeks, slowed to a still-newsworthy 9.7 percent annual gain in March from 10.6 percent in February. Again, this improvement may prove transitory, as flooding in California is set to boost produce prices again. Excluding food and energy, CPI rose 4.5 percent in the year to March, down from 4.8 percent in February.

The fastest-rising component of CPI in recent months has been mortgage interest costs, directly as a result of Bank of Canada rate hikes. This sub-index rose 26.4 percent in March from a year ago, the largest increase on record. Excluding mortgage interest costs, CPI rose 3.6 percent year-on-year, down from 4.7 percent in February. The Bank of Canada's three core inflation measures all fell significantly in the month, with the mean reading falling below 5 percent for the first time since April 2022. 

Today's data mean that CPI is finally below the Bank's overnight rate target and set to head lower still, which suggests rates have likely reached their peak for the current cycle. With the base effect set to remain strong in the next few months, headline CPI should continue to ease, in line with the Bank's expectation that it will reach 3 percent around mid-year. Beyond that, progress toward the 2 percent target will be slower, a fact underscored by the likelihood of higher energy and food prices in the near-term and the continuing impact of rate hikes on mortgage costs as more homeowners renew their financing. That last factor will remain important until such time as the Bank starts to reduce rates, which is unlikely to happen until early 2024