End of carbon tax slows Canada's headline inflation rate but hides 'much less friendly' core data
Canada's inflation rate fell in April, with the Consumer Price Index (CPI) pulling back to 1.7 per cent annually from 2.3 per cent the month before, according to Statistics Canada data released Tuesday. Lower energy costs, with the removal of the carbon tax in many provinces and falling crude oil prices, were a main driver.
Core measures of inflation, however, rose in April, leading economists to scale back expectations for a Bank of Canada (BoC) interest rate cut at its next meeting on June 4.
The core indicators, favoured by the BoC, leave out the effect of indirect taxes and thus weren't affected by the carbon tax removal, CIBC economist Andrew Grantham said in a note published shortly after the data were released.
"Signs of renewed weakening in the economy on one hand, as shown by the latest employment data, but stronger core inflation on the other makes for a tough decision for the Bank of Canada at its early June meeting," Grantham wrote. April employment figures were essentially flat, with unemployment jumping to 6.9 per cent.
Economists had expected the core inflation figures, CPI-median and CPI-trim, to hold steady at 2.9 per cent and 2.8 per cent respectively, according to consensus estimates published by CIBC Economics. CPI-median rose 3.2 per cent year-over-year in April, and CPI-trim rose 3.1 per cent.
The core measures "are now running at their fastest pace in a year — i.e., back before [the BoC] began cutting rates," wrote BMO chief economist Douglas Porter, who said those numbers revealed a "much less friendly" inflation picture.
"After a weak jobs report handed the Bank a good reason to cut, this back-up in core above three per cent pretty much washes that away."
The core numbers can also be "impacted by broad changes in food prices given their heavy weight in the overall basket," CIBC's Grantham said. Grocery prices and the cost of travel tours rose. The price of groceries has been rising faster than overall inflation for three straight months, up 3.8 per cent annually in April. Rising grocery prices, as well as a jump in vehicle prices, which have gone up close to 3.0 per cent since last year, "appears related to the simmering trade war," Porter said.
In a statement sent to Yahoo Finance Canada, Jules Boudreau, a senior economist at Mackenzie Investments, argued that uncertainty on the new federal government's fiscal plans might also cause the BoC to hold in June.
"Higher federal government spending will boost growth and inflation in Canada," Boudreau said. "And with the federal government deciding not to publish a budget this spring, the Bank of Canada won't want to get aggressive with rate cuts before it gets clarity on deficits."
The BoC "will clearly be concerned" about the core inflation data, wrote Desjardins Group economist Royce Mendes, but he noted that the effects of lower energy prices could "further affect price dynamics in a positive way."
Gasoline is among the goods that "tend to form the basis of inflation expectations," Mendes said, and Desjardins therefore expects "a sharp reversal of the spike" in those expectations in the BoC's most recent surveys.
The change in energy prices in April was significant — gasoline prices dropped over 10 per cent from March and fell 18.1 per cent from a year ago. Natural gas costs were down 18.9 per cent on the month and 14.1 per cent on the year.
The BoC's decision-makers "should have an early internal indication of inflation expectations" before their next decision, Mendes said.
"With the economy clearly weakening in recent months, lower inflation expectations should keep central bankers on track to cut rates 25 basis points in June," Mendes wrote.
Economists had expected the carbon tax removal to drive a significant slowdown in overall prices in April, with expectations the annual rate would fall to 1.6 per cent, according to the consensus estimates published by CIBC.
The April CPI data follow March figures that slowed unexpectedly to 2.3 per cent from 2.6 per cent in February, as gasoline and travel costs dropped.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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