That should do it

Canada's headline consumer price index (CPI) rose 2.7 percent in April from a year ago, the slowest annual increase in just over three years, according to data published by Statistics Canada this morning. The details of the report suggest that the way is now open for the Bank of Canada to start the long-awaited easing cycle at its Governing Council meeting on June 5.

The three "usual suspects" that have been largely responsible for pushing CPI higher in the current cycle are now down to two. Gasoline prices were up 6.1 percent year-on-year in April, up from 4.5 percent in March; this reflected the usual switch to more expensive summer blends and the Federal government's carbon tax increase at the start of the month. Shelter costs also continue to rise rapidly, advancing 6.4 percent from a year earlier.  High mortgage costs and pressure on rents from rapid, immigration-driven population increases are behind the continued pressure in this category. 

It is, however, a different and more encouraging story for food prices, the source of so much angst for both consumers and the government over the past year. The annual increase for food purchased from stores slipped to 1.4 percent in April from March's 1.9 percent reading.  The Federal government has made a big show of putting pressure on the large supermarket chains to keep food prices down, proposing to introduce a grocery "Code of Conduct". Can the government now legitimately claim credit for the fall in food price inflation? Well, just this week the largest of the supermarkets, Loblaw, announced it would be willing to sign up to the Code of Conduct after strongly opposing it for many months. The most likely explanation is that the company now believes that the underlying cost pressures that it has always blamed for higher in-store prices have now abated, which has very little to do with the government. 

The Bank of Canada's favoured measures of core inflation are also reflecting the waning of price pressures. All three of those measures now stand below 3 percent -- that is, within the Bank's 1 - 3 percent target range -- with their mean value at 2.7 percent. 

All in all, today's data will likely allow the Bank to implement a 25 basis point rate cut in early June.  However, it is probable the Bank will signal that it will proceed cautiously from there: consumers and markets should not expect further cuts at every Governing Council meeting for the rest of the year. With inflation still above the midpoint of the target range and the US Fed unlikely to cut the funds rate much before year-end, the Bank is unlikely to cut rates by more than 75 basis points in aggregate this year.