Canada’s annual inflation cooled down, but mortgage interest costs rose sharply

Canadian inflation is cooling significantly this spring as expected: consumers face a decline in energy costs and smaller price increases for appliances and certain durable goods.

According to Statistics Canada, the Consumer Price Index (CPI) was up by 4.3% last month on a year-over-year basis, following a 5.2% gain seen in February. A slowing trend didn’t come as a surprise, as it goes in line with financial analysts’ forecasts.

In addition to it, more improvements are expected in the nearest future. The Bank of Canada says inflation will go down to about 3% by the middle of 2023 and reach the target of 2% by the end of the next year.

Prices growth is slowing down as businesses and households adapt to the highest interest rates in more than 15 years, while supply chains rebound from massive disruptions. A base effect also plays an important role in it, as the initial hike in commodity prices caused by Russia’s invasion of Ukraine is no longer included in the annual calculation of CPI growth.

Anyway, the short-term tendency has cooled down significantly. The annualized rate of the three-month change in core inflation (excluding food and energy) reached 3.1% last month, following 3.4% in February. In May 2022, it exceeded 8%.

“Although Canadian households can’t expect massive price decreases now, we can see strong signs that the pace of price growth is stabilizing,” – says Royce Mendes from Desjardins Securitiess.

The report shows that gasoline prices were down by almost 14% annually and up by 1.2% monthly.  The price of durable goods went up by 1.6% on a year-over-year basis and slowed down after February’s 3.4%.

The grocery segment also showed certain improvements, with prices going up by 9.7% from a year ago – it’s lower than the gains of more than 11% reported during the previous months.

At the same time, mortgage interest costs skyrocketed by 26.4% annually, following a 24% hike seen in February. “It’s the largest annual gain on record as Canadians kept renewing and initiating mortgages at higher interest rates,” – the report noted. In case we exclude these costs, the CPI year-over-year increase will reach 3.6%.

Last week, Governor Tiff Macklem several times said the central bank wouldn’t be satisfied with a 3% inflation and rejected market expectations of possible rate cuts this year. The Bank aims at the middle of its target range of 1-3%, leaving some room on both sides of its desirable 2%.

“Markets are no longer predicting rate cuts in 2023. Moreover, now they don’t exclude a possibility of an increase in the nearest future,” – Mendes said. “Nevertheless, as the latest global banking system stresses tightened financial conditions, in our opinion, rate hikes are already behind and the cuts will start next year.”