Canadian Inflation Pressures Fade away in March

• Headline inflation slowed to 1.2%.
• Bank of Canada's core inflation is right on target at 2.0%.

Canadian headline inflation decelerated at a much quicker pace than expected in March. On a seasonally adjusted (SA) basis, Canadian consumer prices were down 0.3% in March. Prices have now fallen for 5 of the last 6 months, as mounting excess capacity in the Canadian economy continues to put downward pressure on prices. On a year over year basis, the rate of inflation has slowed to 1.2%, down from 1.4% in February. The Bank of Canada's core measure of inflation was flat in the month. On a year over year basis, this measure is right on the Bank's target of 2.0%.

Price pressure from shelter costs began to abate as the annual growth in prices fell to 2.1% in March, the slowest pace in five years. Although mortgage interest costs continued to add to shelter costs, it was outweighed by falling energy and replacement costs (likely due to falling home prices) in the month.

In contrast food prices remained a menace as the year over year increase rose to 7.9%, up from 7.4% in February. However, outside of food, Canadians paid less for just about everything else, with consumer prices down 0.2% y/y in March, largely driven by a 4.3% decline in durable prices. Prices of goods excluding food have now fallen for the last six months and remain the lowest they have been in over five years. This is strong evidence that the mounting excess capacity in the Canadian economy is striping away retailers pricing power. This is particularly evident in the transportation sector where prices fell 6.2%. Moreover, the rate of decline in energy prices accelerated in March to 11.5%, down from 8.8% in the previous month.

On a regional basis, the rate of inflation slowed in every province except Ontario and Quebec, which were more heavily impacted by rising food and mortgage interest costs. Alternatively, Alberta experienced the quickest deceleration in inflation as prices barely rose at an annual rate of 0.9%, down from 2.1% in February. Energy costs have eroded substantially in this province, down 15.5%.

In February, inflation surprised on the upside, largely buoyed by food and shelter costs. In March, shelter price pressures have now eased and should continue to do so moving forward. While there are no signs that food price pressures will subside anytime soon, it is clear that the downward price pressures from every other good in the basket due to weakening domestic demand have begun to outweigh these rising costs. As the domestic economy continues to slow in the coming quarters we believe that inflation will be a non-issue for the Bank of Canada. Abating price pressures leaves some maneuvering room for the Bank of Canada to cut rates a further 25 percentage points next Tuesday.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.