Inflation continues to moderate

Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.

Bottom line

Inflation moderated to 4.3% in March and reached its lowest level since August 2021. The moderation is mainly the result of base effects in energy cost and durable goods prices. There are continued signs of modest moderation in underlying inflationary pressures, with most measures of core inflation easing in March yet remaining elevated, above 4%.

Inflationary pressures remain broad but are narrowing narrow slightly, with about 55% of the components of CPI rising at more than 5%, compared to 63% in February. However, the share of components rising by more than 3% was little changed at 72% (see Fig 1.) A reduction in the percentage of components rising by more than 5% will be welcomed by the Bank of Canada as a sign that the worst in terms of inflationary pressures may have passed.

The recent trend in CPI’s monthly changes suggests that inflationary pressures have been relatively stable in recent months and consistent with core inflation at around 3%. The 3-month annualized change in most CPI components remains below their year-on-year changes, suggesting that inflation should continue to moderate (see Fig. 2). The 3-month annualized changes in headline CPI is now at 2.1%, in line BoC’s target band. The measure for CPI excluding food and energy is at 3.1%, only marginally above the BoC’s target range, while it is 2.4% for the BoC’s old measure of core (CPI ex the 8 most volatile components and indirect taxes).

Inflation has clearly peaked and continues to moderate. However, it remains well above the BoC’s target of 2%, inflation expectations are elevated, and inflationary pressures remain broad and likely sticky. Nevertheless, the BoC will welcome an inflation dynamic, as measured by the 3-month annualized changes, consistent with inflation reaching the upper band of its inflation target. In our view, this supports the case for the BoC to leave its policy rate unchanged at 4.5% for the rest of the year.

In Alberta, inflation declined to 3.3%, its lowest since June 2021. Lower transportation costs compared to last year and slower food price increases were the main source of deceleration. However, a sharp rise in electricity costs pushed shelter costs higher, offsetting some of the slowdowns in other components. Inflation excluding food and energy (a measure of core inflation) eased to 4.3%, its lowest since February 2021.

The Consumer Price Index (CPI) increased by 0.5% m-o-m non-seasonally-adjusted in March and the inflation rate moderated to 4.3%, in line with expectations. This is the lowest inflation rate since August 2021. Prices rose on the month in all of the eight major CPI components, led by clothing and footwear (+1.2% m-o-m), recreation, education and reading (+1.1% m-o-m), and alcohol, tobacco and cannabis (+0.9% m-o-m). Transportation costs increased 0.7% m-o-m, pushed higher by a rebound on the month in gasoline prices and a continued rise in passenger vehicles. Shelter costs rose 0.4% m-o-m, led by a rise in mortgage interest costs (+2.0% m-o-m), as more homeowners renewed their mortgages at higher interest rates.

Five of the eight major CPI components decelerated in March on a year-on-year basis. Shelter costs decelerated to 5.4% and remain the main source of inflation, contributing 1.6 percentage points (pp), with about 0.8pp attributable to higher mortgage interest costs. Food prices inflation moderated to 8.9% y-o-y, contributing 1.4pp to inflation. Prices at the grocery stores, especially for meat, dairy and egg, and bakery products, were the main source of food inflation. Transportation costs decelerated to 0.3% y-o-y, barely contributing to inflation, with gasoline prices declining 13.8% y-o-y. Household operation costs grew at a slower pace of 3.3% y-o-y, contributing 0.5pp  to inflation, with the deceleration attributable to a slower increase in furniture cost.

In March, goods prices inflation decelerated to 3.6% from 5.3%, while services inflation moderated to 5.1% from 5.3%. Energy prices dropped 6.9% y-o-y compared to the same month last year. Excluding food and energy, prices increased 0.6% on the month and rose by 4.5% compared to the same month last year, its lowest level since February 2022. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, moderated to 4.3%.

Looking at the BoC’s core measures of inflation, all three indicators decelerated in February. CPI-Median eased to 4.6% from 4.9%, CPI-Trim to 4.4% from 4.8%, and CPI-Common to 5.9% from 6.4%.

In Alberta, inflation moderated to 3.3% in March from 3.6%, the lowest since June 2021. Transportation cost was the main source of the deceleration in inflation and decreased 2.2% y-o-y, compared to an increase of 0.3% y-o-y in February, reducing inflation by 0.4pp, mainly due to lower gasoline prices compared to the same period last year. Food prices decelerated to 8.4% y-o-y and remained the main source of inflation in the province, contributing 1.4pp to inflation. Shelter costs accelerated in March, increasing by 4.5% y-o-y, compared to 2.2% y-o-y the prior month, contributing 1.2pp to inflation. This rebound in shelter costs was due to an increase in electricity costs (+56.6% m-o-m) in March, pushing inflation higher. Household operation costs eased to 3.2% y-o-y from 4.2% y-o-y, contributing 0.4pp to inflation, mainly due to a deceleration in furniture costs.

Goods price inflation decelerated to 1.9% from 2.3%, while services prices eased to 4.9% from 5.1%. Inflation excluding food and energy eased to 4.3%, its lowest since February 2021, while energy costs dropped 16.1% y-o-y due to lower gasoline prices.