Weakness in core inflation measures amid spiking oil prices points to the Bank of Canada having more flexibility to hold interest rates steady, economists say. The consumer price index (CPI) accelerated to 2.8 per cent last month, according to Statistics Canada on Tuesday, but headline inflation was lower than economists' consensus of 3.1 per cent and below the three per cent forecast by the central bank in its April monetary policy report.
The big question for the Bank of Canada is how much of the energy price shock will spill over into core inflation. Here's what economists think the latest data means for the Bank of Canada's next interest rate announcement on June 10.
Core price pressures 'nowhere to be seen': Capital Economics
Capital Economics Ltd. chief North America economist Stephen Brown said the "downside surprise" on headline inflation was partly because food prices came in weaker than expected. Overall food prices in the United States jumped 0.5 per cent between March and April to 3.2 per cent on an annualized basis, according to CPI data released last week. But food inflation in Canada slowed to 3.5 per cent in April from four per cent in March.
However, Brown said the surprise was mainly because the potential indirect effects of higher fuel costs aren't putting pressure on core inflation. Excluding food and energy, CPI slowed to 1.5 per cent in April, the lowest level since March 2021. He said the "even better news" for the Bank of Canada is that the average annual rate for its preferred measures, CPI-trim and CPI-median, is also at a five-year low of 2.1 per cent. That partly reflects the softness of the labour market and consumer demand and reduces pressure on the central bank "to follow through with the interest rate hikes that are priced into markets for the coming months," he said in a note.
Inflationary fears 'off the mark': Rosenberg Research
Aside from energy, inflation was "nowhere to be found" in April, Robert Embree, vice-president and senior economist at Rosenberg Research & Associates Inc., said. "The key macro story is the broad-based cooling in all of the core inflation components, which gives the Bank of Canada plenty of room to consider cutting later in the year instead of hiking," he said in a note. He said markets still see almost two hikes priced in by the end of 2026, but that's a path that "relies on a much more inflationary outcome" than the data support.
"With Canada's jobs engine totally stalled out, the tighter-than-necessary financial conditions from the priced-in rate path are increasingly at odds with the underlying economic reality," he said. Embree said prices for services fell 0.3 per cent from March, "even without excluding energy-sensitive transport components." Year over year, service inflation grew 1.7 per cent. "Without any wage growth, we won't see any burst of services inflation," he said. "Unemployment is too high to get significant inflationary pass-through from this energy shock."
