May 16, 2023
Inflation climbs to 4.4% in April, beating expectations
We want to see a cooling, not collapse, in consumer spending: Investment strategist Brent Joyce
Inflation unexpectedly reaccelerated in Canada but core measures continued to ease, potentially giving the central bank room to keep rates on pause as it waits for the tight labour market to cool.
The consumer price index rose 4.4 per cent in April from a year ago, the first increase in the rate of headline inflation since June 2022, Statistics Canada reported Tuesday in Ottawa. That’s faster than the 4.1 per cent gain expected in a Bloomberg survey of economists, and up from 4.3 per cent in March.
On a monthly basis, the index rose 0.7 per cent in April, versus expectations of a 0.4 per cent gain.
“Having been cut nearly in half since last June, Canada’s CPI accelerated by only a single tick in May, but the 4.4 per cent print will still be a bit of an eyebrow raiser for those counting on steady progress,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors.
Bonds sold off after the data release, pushing Canada’s benchmark two-year yield to 3.894 per cent at 9:20 a.m. in Ottawa — its highest intraday level in nearly a month. The loonie extended earlier gains to $1.342 per U.S. dollar.
Two key measures tracked closely by the Bank of Canada — the so-called trim and median core rates — continued to decelerate, averaging 4.2 per cent from a downwardly revised 4.45 per cent a month earlier, matching economist expectations. However three-month moving averages of the measures, which policymakers have flagged as key to their thinking, actually ticked up.
Services inflation — another closely watched measure — dropped to 4.8 per cent in April, from 5.1 per cent a month earlier.
The figures suggest the path to bring inflation back to target may not be a smooth one. The accumulation of data that point to stickier-than-expected inflation and a resilient job market will test the Bank of Canada’s decision to stick to the sidelines and assess the impact of an aggressive rate-hiking cycle.
“The central bank will need to remain single minded when thinking about the stance of monetary policy,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a report to investors. “The fact that core measures of inflation remained elevated in April will be disconcerting for policymakers. Expect upcoming communications to remain hawkish and focused on bringing inflation to heel, leaving the door open to further rate increases.”
Last month, Governor Tiff Macklem and his officials left the policy rate unchanged at 4.5 per cent for the second straight meeting, saying recent data reinforce its confidence that inflation will continue to slow. Their next rate decision is due June 7.
Officials expect CPI to drift lower to 3 per cent around midyear and return to near the 2 per cent target by the end of 2024. But they’ve warned that getting prices all the way back to target could prove more difficult because inflation expectations are coming down slowly, and service price inflation and wage growth remain elevated.
The latest jobs data, released earlier on May 5, showed Canada’s economy hit its longest run of monthly job gains since 2017, defying expectations of a coming slowdown. Wages also increased by more than 5 per cent for a third straight month. Still, policymakers expect both the labour market and consumer prices to cool in the months ahead.
In April, higher rent prices and mortgage interest costs contributed most to the acceleration in consumer prices on a year-over-year basis, while prices for gasoline led the gains in the headline month-over-month movement.
Shelter costs rose 4.9 per cent from a year earlier. Mortgage interest cost jumped 28.5 per cent as more mortgages were initiated or renewed at higher interest rates, while rent rose 6.1 per cent as rental demand surged.
Gasoline prices rose by 6.3 per cent in April, compared with March, the largest monthly increase since October 2022. The output reduction by oil-producing countries, the switch to summer blend, and an increase in carbon levies led to higher prices.
Prices for groceries rose 9.1 per cent, slower than in March, with the slowdown stemming from smaller price increases for fresh vegetables, coffee and tea.
Regionally, prices rose at a faster pace in April compared with March in five provinces, with Alberta seeing the highest growth partially due to higher electricity prices.