Canadian CPI (inflation) data released Tuesday 16th May showed annualized inflation rose in April from 4.3% to 4.4%, above the consensus forecast of 4.1%. On a monthly basis, CPI rose to 0.7%, up from 0.5% and above the consensus forecast of 0.4%.
Interestingly, Core CPI moved in the opposite direction. Two key yearly measures tracked closely by the Bank of Canada — the trim and median core rates — averaged 4.2%, down from 4.5% in March. This was in line with the forecasts.
The main drivers of inflation were the usual suspects: gasoline, and food prices. Gasoline prices jumped 6.3% in April compared to March. The increase followed OPEC’s recent announcement that it would reduce output, which has pushed oil prices higher. Food prices continued to rise, although there was a slight improvement in April, with a 9.1% gain year-over-year compared to 9.7% in March.
The sharp rise in interest rates continues to weigh on Canadian households. Mortgage interest costs rose a massive 28.5% in April compared to April 2022, as more Canadians took out mortgages at higher interest rates.
Bank of Canada’s Reaction
The slight rise in inflation will come as a disappointment to the Bank of Canada, as this is the first rise in inflation since June 2022. Still, the BoC pays more attention to Core CPI, which excludes volatile items and is considered a better indicator of inflation trends. Today’s inflation data takes on even more important because it is in the last inflation release before the Bank of Canada’s next policy meeting on June 7th. The BoC paused rates in April, for the first time after 10 consecutive rate hikes, and the markets will be very interested in the response of Bank of Canada policymakers to this latest inflation report.
Market Reaction
There were no surprises from today’s inflation report, as the headline and core CPI numbers were within expectations. Still, the USD/CAD currency pair has extended its losses and is down by around 0.40% today. This move is likely in response to a strong US retail sales report, which was released at the same time as the Canadian inflation report. US retail sales climbed to 0.4%, up from -0.7%, and core retail sales improved to 0.4%, up from -0.5%. An improvement in US retail sales has strengthened risk sentiment which likely pushed the Canadian dollar higher.