Morning Market Brief: Wednesday, April 19, 2023

Inflationary pressures in Canada continue to ease

Canada’s inflation rate dropped in March to its lowest level since August 2021, primarily due to a decline in gasoline prices. While inflation remains elevated, it did moderate, falling largely in line with the Bank of Canada’s (BoC) outlook for inflation this year.

• Canada’s annual inflation rate was 4.3% in March. This matched economists’ estimates and was a substantial slowdown from the 5.2% year-over-year rate in February. Canada’s annual inflation rate in March was its lowest since August 2021.
• Easing price growth for food and shelter contributed to March’s slowdown. A 13.8% year-over-year drop in gasoline prices also weighed on consumer prices. The sharp decline came partly due to a high base year in March 2022, when the Russia-Ukraine conflict pushed energy prices up at a rapid pace.?
• Canada’s core inflation rate was also down during the month. The average of two core measures of inflation closely tracked by the BoC – trim and median – eased to 4.50% in March from 4.85% in February.
• The result essentially reaffirms the BoC’s pause on interest rates. Inflation appears to be slowing in line with the BoC’s outlook, which projected a 3.0% inflation rate by mid-year.
• Even with inflation moving lower, the job market and Canada’s economy are proving to be relatively resilient and aren’t showing significant signs of deterioration. The BoC still views inflation as a risk and reiterated it would not hesitate to raise rates further if warranted. It will be important to watch the U.S. Federal Reserve Board (Fed), as it may raise rates further. The BoC might not want its key interest rate to diverge too far from the Fed’s federal funds rate.

With inflation easing and the BoC holding steady, some of the stress on Canadian households and businesses has moderated. This has been particularly notable in Canada’s real estate sector, which has seen increased activity and prices ticking higher as demand strengthens. In equity markets, steady interest rates and recent volatility could make dividend-payers on the S&P/TSX Composite Index a more attractive investment, providing a regular payment and capital growth potential.

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