Canada Preview: Inflation Pace to Slow as Gasoline & Food Prices Wane


Canada Preview: Inflation Pace to Slow

Canada’s March inflation pace is expected to decelerate as lower food and gasoline prices restrain price growth on an annual basis.

Ottawa – Canadian inflation eased in March after gasoline and food prices failed to gain traction.

The Canadian CPI is estimated to have dropped to 1.2% from 1.4% on an annual basis during the third month of the year, according to the market consensus.

Meanwhile, the yearly Bank of Canada (BoC) core CPI measure, which excludes eight volatile components, is projected to have ticked down to 1.7% from 1.9%.

Fresh inflation figures will be released simultaneously with retail trade data at 12:30pm GMT on Friday.

The slow inflation pace will put pressure on the firming Canadian dollar, which hit a fresh nine-month high versus the US dollar earlier this week.

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Limited price gains

Canadian inflation has been looking weaker as annual comparisons of food and gasoline prices have put downward pressure on inflation.

Food prices in March decelerated at least 4% on an annual basis. This marked a shift from the previous months, where food prices steadily climbed on the effects of a lower loonie boosting the costs for all imported goods.

Prices at the pumps also retreated around 10% on an annual basis in March, according to Canadian economists. This trend has been ongoing since the sudden oil price drop at the end of 2014.

Meanwhile, the BoC’s core measure has been benefitting from the lower loonie, but the positive effects from the currency are estimated to subside later in the year, as oil prices recover and strengthen the resource-linked Canadian dollar.

“Pass-through from the cheaper Canadian dollar contributed between 0.5-0.7%-pts to core’s annual CPI rate, but the cheaper currency’s impacts should start to fade in the months ahead,” said Nick Exarhos, economist at CIBC Capital Markets.

On the other hand, higher energy prices will boost the headline CPI measure, helping it reach the target of 2%. “That will be a late-2016 story, with inflation remaining relatively muted until then,” Exarhos added.

BoC’s take

Last week the BoC kept its key interest rate at 0.5% and simultaneously released its latest Monetary Policy Report (MPR).

From the inflation perspective, the BoC said it was not surprised by how the pace was progressing.

The Bank projected that the headline CPI will remain below the BoC’s 2% target, with a risk of decelerating due to the temporary effects of lower oil and the exchange rate. On the other hand, the BoC said that the core inflation will linger near 2% for the same reasons, as a lower loonie boosts prices for imported goods.

During Wednesday’s opening statement in front of the Standing Senate Committee on Banking, Trade and Commerce, BoC Governor Stephen Poloz reiterated a similar stance.

“The upward pressure on imported prices coming from the currency depreciation is being more than offset by the impact of lower consumer energy prices and the downward pressure coming from excess capacity in the economy. As these factors diminish, total inflation is projected to converge with core inflation and be sustainably on target sometime in the second half of next year,” Poloz said.

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