Nothing in the inflation report to prevent a cut in June

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

Bottom line

Inflation decelerated to 2.7% in April to its lowest level since March 2021, in line with expectations. The deceleration was fairly broad-based and led by slower food price increases and continued drag from lower prices for mobile phones and internet plans, and clothing and footwear. Even shelter cost inflation eased slightly, reaching 6.4% y-o-y. The Bank of Canada’s measures of core inflation eased further in March and are now all below 3% (the upper band of the inflation target), the lowest level since July 2021.

In addition, inflationary pressures continued to narrow in April, with 13% of the components of CPI rising at more than 5%, compared to 17% in March. Similarly, the share of components increasing by more than 3% eased to 34% from 37.5% (see Fig 1.). The decline in these measures suggests many CPI components decelerated in April and both measures are at their lowest since the winter of 2021, indicating further narrowing in inflationary pressures. In addition, both measures are now in line with their historical norms.

The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures remains contained in April and is consistent with the BoC target. As such, we observe that many of the 3-month annualized changes in some key CPI components eased further but some, like shelter, remained above 3% (+5.5%) (see Fig. 2). The 3-month annualized changes in headline CPI is now at 2.3 %, after 1.0% in March, mainly due to the recent increase in gasoline prices.

Most importantly, the momentum of BoC’s core measures was 1.6% on average. This is the third time consecutive month that that the momentum in the BoC’s core measure of inflation is below 2.5% (see Fig 2). The inflation momentum suggests that the underlying inflation dynamic has slowed to a pace consistent with the BoC’s target.

There is nothing in today’s report that would prevent the BoC to cut June. With all measures of core inflation below 3%, the momentum in the BoC’s preferred measures below 2.5% and the breadth if the inflationary pressures in line with the historical average, all the conditions we had identified (see) to support a rate cut have been met and support a cut at the June meeting. If the BoC doesn’t cut, it would be a matter of extreme caution in our view, rather than suggesting that upside risks to inflation remain a concern. Nevertheless, whether they cut in June or July has very little impact on the outlook. What matters more will be the speed and the number of cuts we will see over the next year.

In Alberta, inflation decelerated to 3.0% in April from 3.5% in March. A deceleration in utility prices, especially natural gas and electricity,  was a big contributor to the lower inflation. As a result, shelter costs decelerated to 8.5% y-o-y, contributing 2.2pp to inflation, despite continued acceleration in rent due to strong migration to the province. Food prices also decelerated and remained one of the main sources of inflation, adding 0.5pp to headline inflation. Inflation excluding food and energy (a measure of core inflation) edged higher to 2.6%.

The Consumer Price Index (CPI) rose 0.5% non-seasonally-adjusted in April and the inflation rate eased to 2.7%. This was in line with expectations. The increase in prices in April was mainly the result of higher gasoline prices (+4.9% m-o-m), which contributed 0.3 percentage points to the monthly increase. As a result, transportation costs rose 1.6% m-o-m. A decline in food prices (-0.2% m-o-m) and in recreation, education and reading (-0.7% m-o-m) were the main source of drag on CPI in April.

Four of the eight major CPI components decelerated in April on a year-on-year basis. Food price inflation moderated to 2.3%, its slowest since July 2021, and was once of the main source of deceleration in inflation, reducing inflation by 0.1pp. Recreation, education and reading moderated to 1.0% y-o-y, reducing inflation by 0.1pp compared to March.

Despite a modest deceleration in shelter cost to 6.4%, it remains the main source of inflation, contributing 1.8pp, with 0.9pp attributable to higher interest costs and 0.56pp to higher rent. We note that mortgage interest costs are decelerating gradually to 24.5% y-o-y, having peaked at 30.9% in August of last year.

Transportation costs also accelerated to 3.1% y-o-y from 3.0% y-o-y in April due to higher gasoline prices (+6.1% y-o-y), insurance costs and repair costs.

Household operations, furnishing and equipment was the main source of drag on inflation. The component declined by -2.1% y-o-y and reduced headline inflation by 0.3pp, due to lower prices for mobile and internet services (-15.7% y-o-y).

Clothing and footwear was another important source of drag on inflation, with prices declining by 2.6% y-o-y, reducing inflation by 0.1pp. Clothing and footwear prices have declined every months this year on a y-o-y basis.

In February, goods price inflation eased to 1.0% from 1.1% and service prices inflation decreased to 4.2%. Energy prices are 4.5% higher compared to the same month last year, after increasing 2.8% y-o-y in March. Excluding food and energy, prices increased 0.3% on the month and increased by 2.7% compared to the same month last year. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, eased to 1.6%, below the mid-point of the Bank of Canada’s operational target.

Looking at the BoC’s core measures of inflation, they were all lower in April. CPI-Trim eased to 2.9% from 3.2%, while CPI-Median declined to 2.6% from 2.9%. As a result, the average of the two measures inched lower to 2.75%. This is the first time the average of the BoC’s measures of core are below 3% since June 2021.

In Alberta, inflation eased to 3.0% from 3.5% in March. Only three out of eight CPI components decelerated on the month. Shelter costs saw the biggest deceleration, increasing 8.5% y-o-y compared to 10.1% y-o-y in March. Nevertheless, it remains the main source of the higher inflation, contributing 2.2 percentage points to inflation. The easing in shelter costs was due to slower increases in utility costs compared to last year, especially electricity (+5.3% y-o-y in April vs +26.1% y-o-y in March). Nevertheless, rent costs accelerated to 16.2% y-o-y (contributing about 0.9pp to inflation) and are rising faster than in any other provinces.

Food prices decelerated to 3.1% y-o-y but remained an important source of inflation in the province, contributing 0.5pp. Transportation costs decelerated to 3.2% compared to last year, despite gasoline prices being 10.3% higher. The component contributed 0.5pp to inflation in April.

Household operation, furnishing and equipment costs were drag on inflation than in April, declining 3.2% y-o-y. As a result, the sector reduced inflation by 0.5pp. Similarly, clothing and footwear prices fell 2.0% y-o-y, reducing inflation by 0.1pp.

Goods prices inflation eased to 1.6% y-o-y from 2.4% y-o-y, while services prices remained at +4.4% y-o-y. Inflation excluding food and energy edged higher to 2.6%, while energy costs eased to 7.1% y-o-y.