Canada’s annual inflation rate cools to 4.3% in March as gas prices fall, rising food costs slow

Canada’s inflation rate is rapidly cooling as expected this spring, with consumers benefiting from a pullback in energy costs and weaker price hikes for appliances and other durable goods.

The Consumer Price Index (CPI) rose 4.3 per cent in March from a year earlier, down from February’s 5.2-per-cent pace, Statistics Canada reported on Tuesday. The slowdown was widely anticipated and matched financial analysts’ predictions.

And there should be more progress in the coming months. The Bank of Canada projects inflation will ease to around 3 per cent by the middle of the year, before returning to 2 per cent by the end of 2024. The central bank outlined that path for inflation at last week’s rate decision, which held the benchmark interest rate at 4.5 per cent.

Instant reaction to Canadian inflation data: markets no longer pricing in BoC rate cuts this year

Price growth is moderating as businesses and households adjust to the highest interest rates in more than 15 years, and as supply chains recover from significant disruptions. There are also favourable base effects at play: The initial surge in commodity prices as Russia invaded Ukraine is no longer part of the year-over-year calculation of CPI growth.

Even so, the short-term trend has noticeably cooled off. Expressed at an annualized rate, the three-month change in core inflation (excluding food and energy) was 3.1 per cent in March, down from 3.4 per cent in February. It had peaked at more than 8 per cent in May, 2022.

“While Canadian households can’t look forward to broad-based price declines, there are growing signs that the pace of price growth is settling down,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a note to clients.

Gasoline prices fell nearly 14 per cent over the past year, although they were up 1.2 per cent from February. The price of durable goods rose 1.6 per cent in March on a 12-month basis, slowing from a 3.4-per-cent gain in February.

There have also been slight improvements in the grocery sector: Those prices rose 9.7 per cent over the past year, down from increases of more than 11 per cent in recent months.

On the flip side, mortgage interest costs have surged by 26.4 per cent over the past year, rising from February’s gain of nearly 24 per cent. “This was the largest yearly increase on record as Canadians continued to renew and initiate mortgages at higher interest rates,” Statscan said in its release. Excluding these costs, the CPI rose 3.6 per cent over the past 12 months.

On several occasions last week, Governor Tiff Macklem said the Bank of Canada would not be satisfied with inflation ebbing to 3 per cent and pushed back against market expectations that it could start cutting interest rates later this year. The bank aims for the midpoint of a 1-to-3-per-cent range for inflation, giving it wiggle room on either side of its 2-per-cent target.

“We are encouraged with the progress so far. And getting inflation down to 3 per cent this summer will be [a] welcome relief for Canadians,” Mr. Macklem said at a press conference last week. “But let me assure Canadians that we know our job is not done until we restore price stability. That means inflation is centred on the 2-per-cent target.”

While inflation is continuing to subside, the BoC has indicated that the final leg of the journey – bringing CPI growth to 2 per cent from 3 per cent – could prove challenging. This is because inflation expectations are declining slowly, wage growth and services inflation remain elevated and corporate pricing behaviour needs to cool, Mr. Macklem said.

“Markets are no longer pricing in rate cuts in Canada this year and have opened the door to further hikes in the near term,” Mr. Mendes said. “However, with the recent global banking system stresses unexpectedly tightening financial conditions, we think rate hikes are now a thing of the past and cuts will begin around the turn of the year.”