- Headline CPI fell to -0.2% y / y in April; was 2.2% in February
- Lower gasoline and clothing prices offset higher food prices
- Inflation is likely to remain below the BoC’s 2% target through 2021
The Canadian CPI fell sharply in April, falling below zero percent year-on-year for the first time since 2009. In another straight month, a significant fall in gasoline prices was a major driver of easing inflation. A fall in core inflation was also a factor in April, when the food and energy index rose its slowest rate since 2017 (1.3%). The BoC’s core measures experienced a less significant slowdown (on average 1.8%). Smaller core inflation was partly due to a record monthly decline in the clothing and footwear component as well as lower prices for travel arrangements, with companies in both categories accounting for falling demand. By giving some offsets to lower core and energy prices, food prices rose sharply amid strong demand and, in some cases, supply chain disruptions. Prices of household cleaning products and toilet paper – hot commodities in the last two months – also rose.
While store closures presented challenges in collecting price data, StatCan said it was still able to determine prices for 95% of the CPI curve (inaccessible items such as haircuts and sporting events were essentially left out of the index). However, that does not mean that today’s inflation data is an accurate representation of what Canadians are spending their money on right now. Gasoline prices are largely lower because demand is so weak; Lower hotel rates don’t mean much to most Canadians staying at home. Households have pared their spending due to a combination of health constraints and challenging economic conditions. The prices of essentials matter more at this point, especially for the millions who have lost their jobs or seen their hours cut. In that sense, an increase in food prices in April is likely to hurt more than a fall in gasoline prices will help.
The Bank of Canada’s current focus continues to ensure that the financial system works properly. But as the major reopening continues and the economy goes into recovery, BoC’s focus will shift to support growth and bring inflation back to its 2% target. While there is no shortage of uncertainty about the future path of the economy and inflation, we expect a sustained shortage of demand to keep inflation below 2%, even as the effect of lower energy prices fades. It should require ongoing stimulus from BoC, including an extended period of low interest rates and even more quantitative easing.