Inflation in Canada has been a hot topic in recent times, with headline CPI showing a sharp deceleration in March. The country’s consumer inflation figures are set to be released on Tuesday, but analysts at TD Securities (TDS) have already provided a brief preview of what to expect.
According to TDS, headline CPI in March is expected to fall to 4.3% y/y from 5.2% in February, which will be counterbalanced by a large base-effect from 2022. This is in line with market expectations, which peg inflation at 4.3% y/y and 0.5% m/m. This decline in inflation is attributed to several factors, both internal and external, which have contributed to downward pressure on prices.
One of the key drivers in the Canadian inflation trend has been grocery prices, which are expected to remain high even with some moderation on a year-ago basis. The ongoing persistence of tight labor markets and strong wage growth has put pressure on restaurant prices, which will continue to contribute to elevated inflation.
In addition to higher grocery and restaurant prices, rent and mortgage interest costs are also set to post another large increase. However, these will be offset to some extent by a larger decline in homeowner replacement costs. The TDS analysts explain that this is primarily a result of the slowing housing market and tighter housing supply.
Energy prices will also contribute to the inflationary trend, with a modest increase expected in March. Seasonal factors, such as clothing costs, are also expected to be a source of strength, further supporting elevated inflation levels. However, TDS believes that the average of core inflation measures, specifically CPI-trim/median, will see a large drop of 0.35 percentage points to 4.50% in March.
As a quick recap, the upcoming Canadian consumer inflation report is expected to reveal a decline in headline CPI to 4.3% y/y in March, with higher costs in groceries, restaurants, rent, mortgage interest, and energy contributing to the elevated level. However, the average of core inflation measures is expected to drop significantly to 4.50%.
Here’s a more detailed breakdown of the expected outcomes for the various components of inflation:
1. Grocery prices: According to TDS, grocery prices are set to remain a key driver of elevated inflation in Canada, even though there will be some moderation from the year-ago basis.
2. Restaurant prices: The persistence of tight labor markets and strong wage growth will keep upward pressure on restaurant prices, contributing to the trend of inflation in March.
3. Rent and mortgage interest costs: Increases in rent and mortgage interest costs are contributing factors to inflation, but a larger offset is anticipated to come from homeowner replacement costs.
4. Energy prices: A modest increase in energy prices is expected to add to inflationary pressures, though not as significantly as in previous months.
5. Clothing costs: Seasonal factors, such as clothing costs, are expected to be a source of strength, further supporting elevated inflation levels.
TDS’s anticipation of a decline in headline CPI in March supports the ongoing narrative of high inflation in Canada, driven by numerous factors both local and global. This has led to discussions of potential policy measures, such as raising interest rates, to help combat the issue. However, it remains to be seen what steps the Canadian government and the Bank of Canada will take in response to these inflationary pressures.
While the core inflation measures are expected to see a large drop in March, the overall elevated level of inflation remains a cause for concern. The upcoming Canadian consumer inflation figures will provide a clearer understanding of the country’s economic landscape and the potential steps it might take to address these pressing issues.