Accelerating Price Growth in April Highlights the Challenges Ahead

  • In April, the Consumer Price Index (CPI) rose by 4.4 per cent (y/y). This was higher than March’s 4.3 per cent (y/y) increase.
  • Gasoline prices grew by 6.3 per cent (m/m) and were 7.7 per cent lower than a year ago. Year-over-year, food prices increased in stores (+9.1 per cent) and restaurants (+6.4 per cent).
  • Core CPI (excluding food and energy) grew by 4.4 per cent in April (y/y), lower than the 4.5 per cent increase (y/y) in March. Higher prices in several shelter and food subcategories were key contributors to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI grew by 0.6 per cent in April (compared to an 0.3 per cent increase in March).
  • The average of the Bank of Canada’s three core inflation measures fell to 4.7 per cent in April from 5.0 per cent in March. CPI-common fell to 5.7 per cent, CPI-median dropped to 4.2 per cent, and CPI-trim slid to 4.2 per cent.

Key insights

  • Year-over-year price growth inched further away from the Bank of Canada’s target in April. Mortgage interest costs, pushed up by higher interest rates, rose by 28.5 per cent (y/y) and were the key contributor to the year-over-year acceleration of price growth. Excluding mortgage interest costs, the CPI increased by 3.7 per cent in April (y/y). Notably, food prices in stores continued to fall on a year-over-year basis.
  • Progress during the next phase of the inflation battle will be more incremental. And, as in April, there may be reversals. Taming inflation from here will require a tapering of demand, which will provide slower gains than the gains achieved through shedding base effects. This process has already begun, and the Bank of Canada appears tolerant of its pace – for now. But re-accelerating price growth highlights potential trouble ahead. We will get a better picture of how consumers are responding to higher prices when Canada’s national accounts are released at the end of the month.
  • Wage growth and price-setting practices will be important to watch as the year unfolds. Wage growth remains elevated as workers push to reclaim their purchasing power, and inflation expectations remain high. And, over the last two years, many firms have set prices in anticipation of higher costs to come, sometimes even before these costs had a tangible impact on their operations. This has pushed some profit margins above historical norms. While these behaviours may be rational and understandable for workers and businesses individually, they can prolong the fight against elevated inflation. Add falling productivity to this mix, and you have a recipe for a laboured return to the Bank of Canada’s inflation target.