Inflation at its lowest in a year

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

Bottom line

Inflation moderated more than expected in February but remained elevated at 5.2%. Some of the moderation results from a base effect and lower gasoline prices. There are continued signs of modest moderation in underlying inflationary pressures, with most measures of core inflation easing slightly in February yet remaining elevated.

Inflationary pressures remain broad, with almost 75% of the components of CPI rising at more than 3% y-o-y, and more than 60% at more than 5% y-o-y (see Fig 1). The lack of narrowing in inflationary pressures may catch the attention of the Bank of Canada, as it suggests that the easing in headline and core inflation is, so far, mainly the result of a small subset of items.

The recent trend in CPI’s monthly changes suggests that inflationary pressures are losing some momentum in recent months. 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 1.6%, at the lower end of BoC’s target band. However, the measure rose slightly for CPI excluding food and energy to 3.4%, slightly above the BoC’s target range but still suggesting further moderation.

While inflation has peaked and is moderating, 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, that is more consistent with inflation reaching the upper band of its inflation target. In our view, this supports the case for the BoC to continue its conditional commitment to leave its policy rate unchanged, especially in light of the recent banking turmoil globally.

In Alberta, inflation declined to 3.6%, its lowest since June 2021. A sharp decline in energy costs (-21% y-o-y) and a drop in child care costs (-33% y-o-y), due to the agreement between the federal and provincial governments on affordable daycares, were the main cause of the decline in inflation, while a continued rise food prices was the main source of inflation. Inflation excluding food and energy (a measure of core inflation) eased to 4.8%.

The Consumer Price Index (CPI) increased by 0.4% m-o-m non-seasonally-adjusted in February and the inflation rate moderated to 5.2%, both weaker than expectations. Prices rose on the month in seven of the eight major CPI components, led by clothing and footwear (+1.9% m-o-m), household operations, furnishing and equipment (+1.1% m-o-m), and recreation, education and reading (+0.9% m-o-m). A decline in transportation costs (-0.4% m-o-m), mainly due to a 1.0% m-o-m decline in gasoline prices, was the main drag on CPI in February. Shelter cost rose a modest 0.2% m-o-m, as a decline in utilities costs (-1.1% m-o-m) partly offset the rise in mortgage interest costs (+2.2% m-o-m).

Four of the eight major CPI components decelerated in February on a year-on-year basis. Shelter costs decelerated to 6.1% and remain the main source of inflation, contributing 1.8 percentage points (pp), with about 0.7pp attributable to higher mortgage interest costs. Food prices inflation moderated to 9.7% y-o-y, contributing 1.5pp to inflation. Prices at the grocery stores, especially for meat, dairy and egg, were the main source of moderation. Transportation costs decelerated to 3.1% y-o-y, contributing 0.5pp to inflation, with gasoline prices declining 4.7% y-o-y, the first since January 2021. Household operation costs grew at a faster pace of 4.1% y-o-y, contributing 0.6pp  to inflation, despite a sharp decline in child care cost (-14.2% y-o-y), as result of the national child care plan.

In February, goods prices inflation decelerated to 5.3% from 6.4%, while services inflation remained unchanged at 5.3%. Energy prices declined 0.6% y-o-y compared to the same month last year, the first decline since January 2021. Excluding food and energy, prices increased 0.5% on the month and rose by 4.8% compared to the same month last year, marking a slight easing. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, moderated to 4.7%.

Looking at the BoC’s core measures of inflation, all three indicators decelerated in February. CPI-Median eased to 4.9% from 5.0%, CPI-Trim to 4.8% from 5.1%, and CPI-Common to 6.4% from 6.6%.

In Alberta, inflation moderated to 3.6% in February from 5.0%, the lowest since June 2021. Shelter costs was the main source of the decceleration in inflation and increased 2.2% y-o-y, compared to 5.5% y-o-y in January, contributing 0.6pp to inflation. The sharp deceleration was the result of decline in the cost of natural gas compared to the same month last year (-10.4%% y-o-y)) and the continued impact of the electricity rebates put in place earlier this year. Transportation costs also moderated to 0.3% y-o-y, contributing 0.1pp to inflation, as a result of a decline in gasoline prices compared to last year (-2.4% y-o-y). Household operation costs eased to 4.2% y-o-y from 5.5% y-o-y, contributing 0.6pp to inflation, mainly due to a 33.8% decline in child care costs resulting from the federal-provincial agreement on affordable child care. Food prices decelerated to 9.7% y-o-y ans remain the main source of inflation in the province, contributing 1.6pp to inflation.

Goods price inflation decelerated to 2.3% from 4.4%, while services prices eased to 5.1% from 5.6%. Inflation excluding food and energy eased to 4.8%, while energy costs dropped substantially (-20.8% y-o-y) compared to the same month last year, as a result of lower gasoline, natural gas, and electricity prices. This is the biggest y-o-y decline in energy prices since July 2020.

Independent Opinion