Canadian inflation higher than expected at 6.7% in March

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Consumer price inflation accelerated to 6.7% y/y in March from 5.7% in February. That was well above the consensus forecast of 6.1% and the highest rate since 1991.

Energy price growth accelerated to 27.8% (from 24.1% in February), while gasoline price growth reached 39.8% year-on-year (from 32. 3% in February). Food price inflation also increased, to 7.7% (from 7.4% in February), the highest level in more than a decade.

The acceleration in price growth was not just about food and energy. Excluding these categories, inflation increased by 4.6% year-on-year (vs. 3.9% in February).

Prices for durable goods were particularly strong, up 7.3% year-on-year in March, driven by higher car and furniture prices, supply chain issues and rising input costs contributed to these increases.

Service prices are also accelerating, up 4.3% year on year compared to 3.8% in February. As health restrictions continued to ease across the country, rising prices for convenience services contributed to the rise.

Seasonally adjusted, month-over-month prices rose 0.9% after a 0.6% gain in February. March’s increase is the largest one-month increase on record.

All three measures of core inflation from the Bank of Canada accelerated in March. CPI-trim increased by 0.3 percentage point to 4.7%, CPI-common by 0.1 percentage point to 2.8% and CPI-median by 0.3 percentage point at 3.8%. At 3.8%, the average of the three measures was up from 3.5% in February.

Key implications

Inflation was expected to be high in March, but it was even higher than expected. Unsurprisingly to anyone who filled up in March, rising gas prices drove up consumer prices out of proportion. Due to the war in Ukraine, oil price forecasts are more uncertain than usual. However, we expect energy costs to provide less of a boost to inflation going forward.

However, price pressures in other sectors of the economy are intensifying for both goods and services. Inflation is expected to remain above the Bank of Canada’s target range through 2023, which will reduce consumer purchasing power and drive up interest rates.

The Bank of Canada has already responded to the rapid pace of inflation by upping the ante on rate hikes, rising 50 basis points last week. We believe this inflation report supports the case for another 50 pointer in June.

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