Canada's inflation rate eases to 4.3 per cent in March

Shot of a mature man shopping in the cold produce section of a supermarket
Canada's inflation rate eased to 4.3 per cent in March, according to Statistics Canada. (Getty Images)

Canada's annual inflation rate cooled to 4.3 per cent in March, the smallest increase since August 2021.

The deceleration in the Consumer Price Index (CPI) was driven by base-year effects and a slowdown in gas prices, Statistics Canada said on Tuesday. The agency noted in its release that Canadians paid more in mortgage interest costs last month, but that the cost increase was offset by an annual decline in gas prices. On a monthly basis, Statistics Canada said inflation increased 0.5 per cent, or a seasonally adjusted 0.1 per cent.

The pullback in inflation was in line with economist expectations. Economists had expected inflation to come in at 4.3 per cent in March, according to Bloomberg.

"While headline inflation has slowed in recent months, having increased 1.7 per cent in March compared with 6 months ago, prices remain elevated," Statistics Canada said.

"Compared with 18 months ago, for example, inflation has increased 8.7 per cent."

While Canada's inflation rate has been on a steady decline since reaching a peak last summer, grocery prices remain elevated. The cost of food purchased from stores increased 9.7 per cent in March, a slowdown from the 10.6 per cent increase seen in February, with Statistics Canada citing slowing growth in prices for fresh fruit and vegetables. The price of fresh fruit was up 7.1 per cent (down from 10.5 per cent in February) while fresh vegetable prices were up 10.8 per cent (down from 13.4 per cent in February).

Gas prices fell for the second consecutive month in March, dropping 13.8 per cent from last year, marking the largest decline since July 2020. The decrease was largely driven by base-year effects, as prices surged in March 2022 following supply uncertainty in the wake of Russia's invasion of Ukraine.

While shelter costs slowed their pace in March 2023 to a 5.4 per cent increase, down from 6.1 per cent the previous month, Canadians faced much higher mortgage costs after the Bank of Canada's rapid acceleration of interest rates. Mortgage interest costs increased 26.4 per cent in March, up from 23.9 per cent in February, the largest increase on record.

"With total prices rising yet again in March, the deceleration in headline inflation will come as cold comfort to Canadian consumers who have seen prices rise by 14 per cent in the three years since... the pandemic began in March 2020," Royce Mendes, Desjardins' managing director and head of macro strategy, said in a note shortly after inflation data was released. However, he noted that "while Canadian households can’t look forward to broad-based price declines, there are growing signs that the pace of price growth is settling down."

What this means for the Bank of Canada

The latest CPI data supports the Bank of Canada's expectation for inflation to come down to around 3 per cent by mid-2023. The central bank has said it expects inflation to return to its 2 per cent target by the end 2024.

The Bank opted to hold its key interest rate steady at 4.5 per cent last week, but highlighted that getting inflation back to 2 per cent "could prove to be more difficult" for the central bank, citing elevated service price inflation and wage growth, corporate pricing that has yet to normalize and high inflation expectations.

"Today's report shows that all roads do indeed point to 3 per cent inflation in the months ahead," BMO Capital Markets chief economist Douglas Porter wrote in a research note, adding that the key question for policymakers going forward is whether the 4.5 per cent benchmark rate is "acceptably restrictive given those inflation trends."

"We and the Bank of Canada believe so, but the BoC will need to be patient at that level to push inflation back into the target zone below 3 per cent," Porter wrote.

"Overall, there's thus not much here to change the near-term outlook for policy. The Bank remains on hold, with a bias to tighten further if necessary."

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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