There’s good news out this morning for consumers and our central bank alike. In what has been the most optimistic inflation development seen in two years, Statistics Canada reported the Consumer Price Index grew by just 4.3% in March. That’s a significant decline from the 5.2% increase recorded in February, and a clear indicator that the Bank of Canada’s efforts to cool spending are working their way through the economy.
According to StatCan, it’s the smallest annual increase since August 2021, when the measure rose by 4.1%. Lower energy prices – gas fell by -13.8% – were the biggest factor behind slowing CPI, while surging mortgage interest costs contributed the most to its growth; Canadians are now paying 26.4% more on their home borrowing costs than they did a year ago.
“This was the largest yearly increase on record as Canadians continued to renew and initiate mortgages at higher interest rates,” states StatCan.
As borrowers are well aware, the BoC has hiked its benchmark overnight lending rate – which in turn sets the pricing for variable mortgage rates – a historic eight times between last March and this January, bringing it from a pandemic low of 0.25% to 4.5% today. Fixed mortgage rates have also steadily increased over the past year, as the bond market has reacted sharply to steep inflation and recession fears.
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The core inflation measure – which strips out the most volatile food and energy components – was also down, with a 4.5% increase compared to 4.8% the month before.
However, StatCan points out, certain spending categories – namely food prices – remain elevated, with the cost of groceries up 9.7%; while down from February’s 10.6% number, that’s still putting a significant squeeze on consumers’ wallets.
The effects of “painful medicine”
Nonetheless, this progress on both the headline and core measure is exactly what the BoC wants to see, and further supports their ability to hold rates in their upcoming June 7 announcement, and the months beyond.
In an economic update note, RBC Economist Claire Fan writes, “Inflation is still running above the Bank of Canada’s target, but has shown persistent signs of easing. Interest rate increases over the last year are expected to continue to filter through to raise household debt payments with a lag. That should keep slowing consumer spending, and further ease price pressure ahead.”
She adds that until Core CPI reaches 3% – expected by the end of this year – the BoC won’t deviate from its current holding stance to cut rates.
Adds Desjardins Principal Economist Marc Desormeaux, “The Bank of Canada should be encouraged by today’s inflation print, as it suggests the painful medicine of sharply raising interest rates is having its intended impact in the most interestsensitive sectors. We reiterate that the Canadian economy has yet to feel the full effects of last year’s rate hikes, and that more economic weakness over the course of 2023 should help to bring prices to heel. As such, we still think that the central bank will move to cut borrowing costs towards the end of this year.”