Canadian inflation slowed last month, though most people are unlikely to have noticed much savings (if any). Statistics Canada (Stat Can) data shows the headline Consumer Price Index (CPI) slowed in April. It was a result of last month’s removal of the consumer carbon tax, leading to an abrupt but temporary decline. However, a look beneath the headline data reveals the Bank of Canada’s (BoC) preferred measure of inflation is accelerating, and breached the central bank’s upper tolerance band.
Canadian Headline Inflation Falls After Carbon Tax Removal
Canadian headline inflation showed a healthy reduction, due entirely to the removal of a tax. CPI annual growth fell to just 1.7% in April, a sharp drop from the 2.3% reported a month before.
The decline was due almost entirely to the 12.7% drop in energy prices—the result of ending the carbon tax. It was partially offset by food prices, which saw annual growth hit 3.8% last month, up from 3.2% in March. It was the third consecutive month food prices accelerated, outpacing headline CPI.
Those hoping that slowing headline inflation may be good news for rates are in for a disappointment. Ending the carbon tax had a disproportionate impact on the headline model, temporarily obfuscating the general acceleration of price growth.
Excluding volatile energy prices, inflation accelerated. CPI ex-energy rose to 2.9% for April, up from 2.5% in March. This implies the underlying inflationary pressures persist, and monetary policy is struggling to rein in inflation.
Source: Statistics Canada.
Bank of Canada Preferred Measures of Inflation Shows Acceleration—Above Policy Tolerance
The BoC-preferred Core inflation measures remove the most volatile components of inflation. By reducing the impact of a handful of volatile movements, the central bank can better understand the influence of monetary policy on price.
CPI Core accelerated and has breached a critical level. Annual growth of CPI-Median reached 3.2% in April, up from 2.8% a month before. CPI-Trim also climbed to 3.1% last month, up from 2.9% in March. Both measures have breached the central bank’s upper tolerance band, implying inflation has slipped out of their control.
The market responded by trimming the likelihood of another rate cut to just 40% for June. On one hand, the BoC is seeing rising unemployment and weak household consumption, which should slow inflation. On the other, credit growth has been robust and inflation is now outside of the target. It would be bold for the central bank to dismiss rising inflation as a transitory trend twice in less than 5 years, but not exactly surprising.
And the discounted energy blip was already wiped out in May, so where does that leave the headline data?
Good insight. Noticed the news reporting on this earlier said inflation was dropping due to the carbon tax. A change in fiscal policy isn’t the same as a decrease in inflation. Objectively, economists would more likely see it as an inflationary measure since it increases disposable income and thus demand.
When are we getting real inflation data? Because I know literally zero people who think inflation is so slow they should delay purchases.
Ironically, that’s the mechanism behind rate cuts. They’re trying to stimulate demand for hard goods like housing so people will be motivated to purchase more, and drive inflation higher.
They’re struggling because they keep cutting and inflation is rising but there’s no material demand increase.
There is zero market demand for aything. Unemployment up
Businesses closing there doors ie. They Bay ..like come on!!!
Carbon tax was added and now removed and as mentioned we are under the 2% target for inflation for rate cuts so BOC will continue course.
Rate cuts or .75% in 2025 should happen!
Enjoy.
Bank of Canada MUST decrease interest rates to zero and increase immigration in order to support the economy.
Many Canadians depend on the value of their home to increase and this should be supported by the government.
Yes, but starting AFTER April Canadians are now without their big quarterly Carbon Rebate cheques from the same government, and hence Canadians (starting AFTER April) will have less money to spend, will thus spend less, and that will rein in price inflation.
(When turning over the stone, you can’t just uncover half the rock.)
Could it be interest rates are too low? Maybe even far too low? Asset prices (and therefore asset owners) and borrowers are the beneficiaries. Aren’t Canada’s biggest borrowers our governments? If lower interest rates induce more borrowing and more spending, is that what Canada really needs? Higher interest rates would induce more saving, reduce home and other asset prices and reduce reckless spending and borrowing. If low interest rates were the answer, Canada would be in the tall grass by now. But we’re not, are we?
Why do people saddle themselves in debts to try and earn a rental income in Canada when rentals are one tenth the cost in the USA? Rents get paid in USA dollars!
Daniel, I wouldn’t worry too much about the core inflation measures in the Bank of Canada’s operational guide now. If you remember, there used to be three of them, and all three were confirmed as part of the operational guide again in the 2021 renewal agreement, then CPI-common was almost immediately thereafter pluto-ed out of the operational guide. These things should not happen in a properly functioning central bank. Anyway, CPI-common showed only a 2.5% inflation rate in April, up from 2.3% in March.
The Bank of Canada is basically a laughing stock among central banks in the preferred core measures it has chosen. No other central bank in the world has a preferred core inflation measure that is sensitive to interest rate changes. Our old operational guide, CPIX, excluded mortgage interest, and, unsurprisingly, it is showing a lot less inflation. It went from a 2.2% inflation rate in March to 2.5% in April, an increase much smaller than for CPI-trim or CPI-median.
Before the last renewal of the inflation-control agreement I tried to sell Freeland on the idea of replacing the CPI with the CPI excluding mortgage interest. This would automatically take the mortgage interest component out of all the core measures that include it. She just ignored me, not even deigning to acknowledge receipt of my e-mail. Maybe these non-exclusionary core measures would look better if they were based on CPI ex mortgage interest. They would certainly look different.
The rider on the BLACK HORSE has a pair of scales in his hand.
What’s happening here? Why wasn’t my previous comment (repeated below) posted. I think I was following all of your rules. This is frustrating.
Daniel, I wouldn’t worry too much about the core inflation measures in the Bank of Canada’s operational guide now. If you remember, there used to be three of them, and all three were confirmed as part of the operational guide again in the 2021 renewal agreement, then CPI-common was almost immediately thereafter pluto-ed out of the operational guide. These things should not happen in a properly functioning central bank. Anyway, CPI-common showed only a 2.5% inflation rate in April, up from 2.3% in March.
The Bank of Canada is basically a laughing stock among central banks in the preferred core measures it has chosen. No other central bank in the world has a preferred core inflation measure that is sensitive to interest rate changes. Our old operational guide, CPIX, excluded mortgage interest, and, unsurprisingly, it is showing a lot less inflation. It went from a 2.2% inflation rate in March to 2.5% in April, an increase much smaller than for CPI-trim or CPI-median.
Before the last renewal of the inflation-control agreement I tried to sell Freeland on the idea of replacing the CPI with the CPI excluding mortgage interest. This would automatically take the mortgage interest component out of all the core measures that include it. She just ignored me, not even deigning to acknowledge receipt of my e-mail. Maybe these non-exclusionary core measures would look better if they were based on CPI ex mortgage interest. They would certainly look different.
U of W just published a study on rents in Toronto. Our political class will likely feign surprise at its findings. It also explains why Ford called an early election. This should be front page news in every paper and news program in Canada…
https://journals.sagepub.com/doi/10.1177/0308518X251328129