Canada’s population is surging but it isn’t producing much demand for goods and services. Statistics Canada (Stat Can) data shows the Consumer Price Index (CPI) slowed in February. Weaker demand from households is allowing supplies to rise and taming price growth. The rapid deceleration has led to an unusually large gap compared to the US.
Falling Phone & Internet Bills Were Enough To Drive Inflation
Canadian CPI came in much lower than anyone anticipated. The monthly price advance was 0.3% in February, with prices 2.8% higher than last year. Down from the 2.9% annual growth reported in January, showing notable progress towards the central bank’s 2 point target.
The largest downward pressures on annual growth included phone bills (-20.5%), internet services (-13.2%), and homeowner replacement costs (-1.4%). Stat Can attributes the decline in the first two factors to promotions offered by service providers, as well as increased mobile phone data—a good reminder that hedonic adjustments are included in addition to the sticker price paid.
Upward pressure was created by mortgage interest (+26.3%), which is high but lower than last month. The indicator is finally heading in the right direction. It was followed by rents (+8.2%) and restaurants (+5.1%).
Canadian Core Inflation Suddenly Plunges, Much Lower Than US
Most surprising is the slowing price growth wasn’t just headline CPI, it was also seen in Core CPI. Core CPI spiraled down to 2.8% as well, shaving off a mind-blowing 0.6 points in just one month. This measure is preferred by the Bank of Canada (BoC) due to its lack of volatility, but that seems fairly volatile.
“What really stands out is the growing gap between the U.S. and Canada on this measure of underlying inflation,” says Douglas Porter, chief economist at BMO.
US Core CPI showed annual growth of 3.8% in February, a full point higher than Canada. “This widening gap, which may be due to softer underlying spending growth in Canada, is a solid argument for the BoC leading the Fed on the rate cut front,” he explains.
How long the divergence can last will be interesting. Falling interest rates in Canada would lead to weakness against the US dollar, which most commodities are priced in. As a result, the currency weakness can become an inflationary pressure on its own.
Daniel writes : “Most surprising is the slowing price growth wasn’t just headline CPI, it was also seen in Core CPI. Core CPI spiraled down to 2.8% as well, shaving off a mind-blowing 0.6 points in just one month. This measure is preferred by the Bank of Canada (BoC) due to its lack of volatility, but that seems fairly volatile.” The measure Daniel refers to is the CPI excluding food and energy (CPIXFE). It is not and was never the preferred core measure of the Bank of Canada, that is, its operational guide. It was, for lack of anything better, the referenced core measure in the first months of inflation targeting until the superior CPI excluding food and energy and changes in indirect taxes (CPIXFET) measure had been developed, which became the first operational guide. The only advantages of the CPIXFE are that it is more comparable with the most commonly used US CPI core measure, as in the chart Daniel has provided, and it is, for some strange reason, released a day earlier than the CPIXFET. The superior CPIXFET measure shows even lower inflation than CPIXFE, falling from 2.8% in January to 2.6% in February. CPIX, which is, quite dysfunctionally, the only core measure than excludes mortgage interest cost, shows an even lower inflation rate at 2.1%. The quite unsatisfactory operational guide, now defined as CPI-median (3.1%) and CPI-trim (3.2%), with CPI-common dropped unceremoniously shortly after a renewal agreement that was supposed to define the operational guide for the next five years, is obviously unfit for purpose. It might be adequate if, like CPIX, it was made to exclude mortgage interest cost. This was a fix that could easily have been made at the time of 2021 renewal agreement, but it didn’t happen.
Statistics Canada notes: “February was the first month since October 2021 that grocery prices increased at a slower rate than headline inflation. The slower price growth is partially attributable to a base-year effect, as food purchased from stores rose 0.7% month over month in February 2023, due to supply constraints amid unfavourable weather in growing regions, as well as higher input costs.” It is hard to fathom why Statistics Canada would ascribe part of the drop from a 3.4% inflation rate for groceries in January to a 2.1% inflation rate in February, to a base YEAR effect. Even if one accepts their frame of reference, we are talking about a move from a January 2023 base to a February 2023 base, i.e. a change in base month. But there is really no need to do so. What is relevant is the substantial 0.72% monthly inflation rate for January 2023, which created an exit effect of -0.74% after amplification by the 11-month inflation rate from February 2023 to January 2024 of 2.65%. It is partly because of this that the monthly inflation rate for February 2024 (-0.5%) less the monthly inflation rate for February 2023 (-0.7%) is -1.2 percentage points, while the difference between the annual inflation rates for the two months is -1.3 percentage points.