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Hotter-than-expected April inflation raises rate hold doubts

April was an unexpectedly hot month for Canadian inflation, outstripping analysts’ forecasts and raising fresh possibility of additional rate hikes.

According to Statistics Canada, the Consumer Price Index (CPI) rose by 4.4% year over year – slightly higher than the 4.3% March reading. That’s the first increase seen in headline inflation since last June, and could signal the measure is starting to trend in the wrong direction; it needs to return to a target of 2% by next year in order for the Bank of Canada to hold off on tightening monetary policy further. On a monthly basis, inflation is up 0.7%, following a 0.5% gain in March. 

The report reveals housing costs – such as rising rent prices and mortgage interest – were the largest overall contributors to the higher pace of growth, up a combined 4.9%. This is due to both new mortgages signing on at higher rates as well as renewing borrowers who are finding themselves having to take on higher rates than when they first got their mortgage contracts. In fact, the data agency reports, Canadians are paying 28.5% more in mortgage interest costs than they were in April 2022.

Gas prices also saw their highest surge since October 2022, up by 6.3%; this follows an announcement earlier this month that OPEC+ nations would be reducing their output. Grocery prices, meanwhile, eased slightly as prices fell for items like vegetables, coffee and tea, rising 9.1% in April, compared to 9.7% in March.

The silver lining of the report, however, is that “core” inflation – which strips out the volatile food and energy items from the basket of goods – cooled slightly, slowing to 4.4% from 4.5%. That will help give the BoC rationale to stick with its rate-hold mandate, say economists, despite the headline number remaining outside the central bank’s comfort zone.

“Headline inflation rate in Canada accelerated slightly in April, to 4.4% from 4.3% in March. That's above our own and consensus expectations,” writes RBC Economist Claire Fan in an economic update note. “Inflation in Canada accelerated in April, but has still on balance been easing since peaking in summer 2022. Early signs that the lagged impact of higher interest rates are weighing on economic growth suggest underlying price pressures should continue to ease. The BoC is expected to stay on the sideline for the remainder of the year.” 

Leaving "the door open" to rate hikes

However, Marc Desmoreax, Principal Economist at Desjardins, says further tightening could be in the realm of possibility. 

“April’s inflation data leave the door open for further Bank of Canada rate hikes. Price reacceleration combined with continued strength in the labour market suggest that the economy remains out of balance,” he writes. “We still think softening economic activity will eventually help bring inflation to heel, but today’s data suggest that the process could take longer than previously anticipated.”

All eyes on remaining May economic reports

Given how data-dependent the central bank currently is, all analyst eyes will be peeled for economic reports due before its June 7th announcement for signs on its next move, including retail trade on the May 19th, payroll employment on the 25th, and GDP on the 31st. 

“Wading through all the moving parts suggests underlying core inflation is settling in around 4%, which is clearly still too high for the Bank of Canada's comfort,” writes Robert Kavcic, Senior Economist and Director, Economics, BMO. “With policy rates on hold at 4.5%, that leaves us with slightly positive real overnight interest rates. But the 'core' question that tight enough? Maybe, but we (and the BoC) will be watching how some of the more interest-sensitive sectors of the economy, and the job market, evolve in coming months.”

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