Highlights:

  • All items inflation edged back down to 2.2% year-over-year in April after having increased to 2.3% in March. Market expectations, and our own, were for headline inflation to hold steady at 2.3%.
  • CPI ex food and energy also dipped slightly to 1.8% from 1.9%.
  • The Bank of Canada’s core measures, however, generally increased in April. The trim and median measures both rose to 2.1%. Including CPI-common, the average of the three was 2.0% after rounding for a third consecutive month.
  • After accelerating over the last two months, energy inflation slowed on a year-over-year basis as a sharp increase in gasoline prices in April 2017 was not matched this year. We should see the opposite in May, with pump prices having increased recently compared with a decline a year ago.
  • Lower prices for recreational goods and services, and particularly travel services, weighed on inflation in April.

Our Take:

One of the first things Governor Poloz said in his April press conference was that, “inflation is on target and the economy is operating close to potential”. Today’s inflation and retail sales data, the last major releases before the BoC’s May 30 meeting, reinforce that view. The bank’s core inflation measures averaged 2.0% for a third consecutive month. We saw some evidence of underlying inflation accelerating earlier this year—seasonally adjusted prices excluding food and energy were up an annualized 2.7% in Q1—but that wasn’t the case in April with core prices coming in flat month-over-month. Rising gasoline prices should push headline inflation higher in the near term, but the BoC anticipated that (their Q2 forecast is 2.5%) and has indicated some tolerance for above-target inflation given downside misses in recent years. As for the economy operating close to potential, this morning’s increase in retail sales provides further evidence that January’s soft GDP was transitory. We continue to expect GDP growth in Q1 as a whole was right on the BoC’s 1.8% estimate of the economy’s potential. The upshot is the bank has little reason to deviate from their narrative that less stimulus will be required over time. But with reasons to remain cautious, we continue to think the next hike will be in July rather than May.

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