MNI: Canada CPI In BOC Target Range For 3rd Month, Core Slows

Canada's inflation rate moved up a notch as expected in March on gasoline prices though the 2.9% pace remained within the central bank's target band for a third month and core prices continued slowing, keeping a June interest-rate cut in the realm of possibility that Governor Tiff Macklem alluded to earlier this month.

The uptick in the consumer price index matched economist forecasts and so was the pressure from gasoline prices that rose 4.5%. Shelter costs that have drawn concern rose at the same pace as the prior report with a 6.5% increase. 

Core indexes showed the continued improvement that Macklem has said he needs to see before he can cut the highest borrowing costs since 2001, with both indexes tracked by the BOC slowing a third consecutive month. The median measure faded to 2.8% from 3% and the trim measure to 3.1% from 3.2%, now both the lowest since mid-2021. Some former advisers have told MNI the Bank likely wants core rates firmly below the top of its 1%-3% target band for headline prices before officials will be confident about lowering rates. 

The report is in line with the Bank's forecast inflation will be around 3% in the first half of this year on elevated gasoline prices, with officials projecting CPI will move below 2.5% in the second half and to the 2% target in 2025. Many investors see the Bank cutting in June though more are betting on July since last week's U.S. inflation data came in stronger than expected. Macklem has said he's prepared to move independently. 

StatsCan noted the split between the 4.5% gain in services prices and the 1.1% increase for goods, something the BOC has also been watching. The services increases are also in line with elevated wage gains the Bank says are out of whack with Canada's tepid labour productivity. Another barrier to cutting rates may follow later Tuesday with a federal budget economists predict will bring in extra spending that's faster than the economy's potential. 

Inflation has exceeded the Bank’s 2% target for three years now. That brings concerns about inflation expectations and second-round effects from bigger wage demands. Macklem has also said he doesn’t have to wait until inflation is all the way back to 2% before he cuts interest rates, and while upside risks are more important right now he doesn’t want to overdo restrictive policy and needlessly damage the economy.

Food prices that have bedeviled consumers and been highlighted by StatsCan for a long time now for once didn't rate a special mention in the March report. The agency's data table showed a relatively modest 3% gain from a year earlier. Prices fell 0.2% on the month.