- BoC’s preferred core inflation measures softened…
- ...against a still-hot trend
- The end of the GST/HST cut lifted CPI…
- ...but this was offset by possibly tighter margins, and weaker travel prices
- The BoC’s move tomorrow is unlikely to over react to one print…
- … as the focus remains on forward-looking risks to inflation
- Canada CPI m/m %, March, NSA:
- Actual: 0.3 / 2.3
- Scotia: 0.7 / 2.7
- Consensus: 0.7 / 2.7
- Prior: 1.1/ 2.6
- Core inflation, March, m/m % SAAR:
- Trimmed mean CPI: 1.7
- Weighted median CPI: 1.7
Canadian core inflation slowed in March. For a change, that is. I don’t think the reading will impact the BoC’s stance tomorrow for reasons offered below. Markets kind of leaned that way as well with pricing for the decision little changed and at just over a one-in-three chance of a cut. I argued both cases for a cut and a hold in my Global Week Ahead and we ever so slightly lean to a hold.
Key is that the BoC’s two preferred measures of core inflation slowed to 1.7% m/m at a seasonally adjusted and annualized pace (SAAR). Chart 1. Traditional core CPI (ie: ex-food and energy) fell by -0.8% m/m SAAR.
That’s the main reason why headline fell shy of everyone’s expectations at 0.3% m/m NSA. The effects of the end of the GST/HST cut worked as expected by lifting CPI by 0.4% m/m NSA as shown by the spread between CPI and CPI excluding the effects of changes in indirect taxes (chart 2). But this was an unusually light month of March for seasonally unadjusted CPI (chart 3).
Why? Well, that’s inherently speculative, but I think what may have happened is that retailers swung from crowding in some of the space vacated by the GST/HST cut when prices firmed excluding tax cut effects, to reducing margins when the tax hike kicked in last month. That may have been part of why clothing and footwear prices were flat in seasonally adjusted terms, but restaurant prices continued to rise.
Ergo, we should look at trends. Enter chart 4. The BoC’s preferred core readings have been rather warm throughout the past year with last month being a rare exception. It would be laughable if the BoC seized on one report.
Another big reason for fading this is that the first round effects of trade wars was disinflationary as Canadians aborted travel plans particularly to the US. That’s why the 10% weight on the recreation, reading and education category and its –2.1% m/m SA drop shaved about 0.2ppts off of total SA CPI. Chart 5 shows why; travel tour prices plunged by about 20% as Canadians boycotted travel due to a weak currency and as a protest against the Trump administration’s slanderous treatment of Canada.
Expect more of this going forward. Chart 6 shows the tight correlation between the two-way travel spending balance and USDCAD movements over time. Canada was running a travel spending deficit of about 1% of nominal GDP about a decade ago (ie: spending more abroad than foreigners were spending in Canada) but this has since swung to a surplus of about 0.2% at the end of 2024 and with probably a bigger surplus when we get Q1 numbers.
And yet going forward, the BoC will be more concerned about trade war effects that could add to inflation risk such as tariffs on imports and supply chain effects relative to how trade wars create more disinflationary spare capacity. That uncertainty will continue to dominate the narrative.
Across other details, note the wild volatility in services inflation (chart 7) and the firm price inflation for goods ex-food and energy (chart 8). These categories include tax changes.
Please see charts 9–17 for other components.
Charts 18–19 break down the CPI basket in y/y terms and in weighted contributions to the y/y change in CPI by component. Charts 20–21 do likewise for month-over-month prices.
Lastly, the accompanying table provides more details and micro charts.
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