Canada CPI: more good news

Last week's US CPI report for February showed a small uptick in headline inflation, largely as a result of rising gasoline prices. It was generally expected that Canadian CPI would show the same pattern, but in the event, when the data were released this morning they showed a marginal slowing in the headline rate and generally encouraging trends in the special aggregates. 

Per Statistics Canada, headline CPI rose 2.8 percent year-on-year in February, down from 2.9 percent in January. The expert consensus had foreseen an uptick to 3.1 percent, largely because of higher gasoline prices.  Gas prices did indeed move higher in the month, but this was more than offset by lower prices in a variety of categories, including cell phone and internet services -- both notoriously expensive in Canada.  Even more welcome from a policy viewpoint, costs for food purchased from stores also moved lower, with the year-on-year increase of 2.4 percent falling below the headline inflation rate for the first time since October 2021. The only outsized sub-component of CPI is now the shelter index, which rose 6.5 percent from a year ago, reflecting both high mortgage interest costs and upward pressure on rents. 

Excluding the always volatile price of gasoline, CPI rose 2.9 percent from a year ago, down from 3.2 percent in January. All three of the Bank of Canada's preferred measures of core inflation edged lower in February, with their mean value now just above 3.1 percent.

Today's numbers certainly help to build the case for the Bank of Canada to contemplate rate cuts, but it remains unlikely that any move in that direction will come until the June 5 Governing Council meeting. Market expectations for rate cuts by the US Federal Reserve have been scaled back in the wake of last week's CPI data, something the Bank of Canada cannot ignore.  Moreover, it is likely that gasoline prices will push headline CPI higher in both March and April, not least because the Federal government will raise its despised carbon tax levy on April 1. The Governing Council meeting on April 10 may well echo the cautiously dovish tone seen earlier this month, but a rate cut at that time remains very unlikely.