Canadian Consumer Price Index (March 2024)

Inflation up slightly in March as expected

• Headline CPI inflation moved slightly higher in March to 2.9% year-on-year (y/y), matching expectations.  
• Higher prices at the pump contributed the most to the acceleration in headline inflation in March. Excluding gasoline, all-items CPI slowed to 2.8% y/y from 2.9% in February. 
• However, over the past year, Canadian inflation remains largely a shelter story. Rents (+8.5% y/y) and mortgage interest costs (+25.4% y/y) are contributing the most to the year-on-year gains in headline CPI. CPI ex-shelter was up only 1.5% y/y on March. 
• One piece of good news was softer goods inflation, which stepped down from 1.2% y/y in February to 1.1% y/y in March. Consumers are also seeing lower inflation for food, which is at 3.0% y/y in March, down from a peak of 10% last year. 
• The bigger piece of good news was that the Bank of Canada's preferred "core" inflation measures were very soft in March and are now only running at an average of 1.3% annualized over the past three months, and 2.4% annualized over the past six months. This has helped take year-on-year core inflation down again in March, averaging 3% y/y versus from 3.1% in February.
• The main categories weighing on inflation during the month were household operations, furnishings and equipment (-2.3% y/y) and clothing and footwear (-2.7% y/y). Within household operations, communications services were down 17.3% y/y.   

Key Implications

• March's inflation report marks three straight months of good news on core inflation. After appearing to stall in the latter part of last year, price pressures within the BoC's core measures have returned to cooling. With inflation still at the top of the BoC's range, we expect the bank will want to see a bit more confirmation before taking rates lower and lean towards a July cut. However, if the numbers continue to soften by more than we are expecting, risks are tilted towards an earlier move. Markets have upped their bets for a June cut on today's number, which is now about two thirds priced in.
• Governor Macklem acknowledged the progress on inflation last week and will no doubt be reassured to see it continue, but not surprisingly kept his cards close to his chest on how much more confirmation he needs to see in order to cut interest rates. He will have an opportunity to update his assessment today at the IMF-WB meetings where he has a Fireside chat alongside Fed Chair Powell at 1:15 pm EST.  However, with no audience Q&A or media questions, so we may not get much new guidance. 

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