The headline inflation rate in Canada climbed in March, as expected
- The headline CPI jumped 2.2% year over year in March, due to the drop in energy prices a year ago
- Ex-food and energy products remain weak at 0.9%, but the BoC’s preferred core measures have increased slightly
- Firming underlying price pressure ahead with higher demand
As expected, headline CPI growth posted a remarkable 2.2% year-over-year increase, driven by a rebound in the energy component (+ 19%). Oil prices in March of last year were unusually low, as demand fell as production in major OPEC countries increased. Price growth for housing and transportation components also increased in March, supported by declines in electricity, natural gas and gasoline comparables a year ago.
Food prices continued to grow at a rate of close to 2%. Furniture and household equipment prices again rose sharply (+ 5.3% year-on-year) as consumers stayed closer to home. Homeowner replacement costs (the cost of a newly built home) also jumped 7.3% from a year ago, but mortgage payments fell 6.3% on lower prices. interest rate. Falling demand has also lowered the prices of clothing and footwear. Core CPI excluding food and energy components rose moderately, up 0.9% from a year ago. Still, there are signs of rising underlying inflationary pressure, with more than 50% of goods and services in the CPI basket up 2% or more in March.
Year-over-year CPI readings will continue to accelerate in the near term due to unusually low oil prices in the spring of a year ago. Policymakers will be looking at this volatility in energy prices. Wider core inflation trends will be watched more closely, outside of energy prices. The economy’s supply has sounded the inflation bell as input prices rise. And a stronger-than-expected rebound in household spending may come up against capacity constraints to push prices up. We see this as a risk for later in 2021, subject to a healthy reopening of the economy.