Canadian Consumer Prices Rose 0.4% on a Monthly Basis in April
The all-items Canadian CPI rose 0.4% in April, matching the increase in each of the previous three months, though slightly stronger than the 0.3% expected by markets going into the report. The monthly rise was modestly stronger than the 0.3% gain recorded in April 2011, resulting in the year-over-year rate edging up to 2.0% from 1.9% the previous month and above market expectations for a 1.9% increase.
Expectations of a moderation in the pace of increase in energy prices in April came to fruition in May, with the component up 0.9% on a monthly basis compared to 1.7% in March, reflecting a smaller gain in gasoline and electricity prices and a decline in the price of natural gas. Energy prices were up 1.1% on a year-over-year basis, down sharply from 5.1% in March and the slowest annual increase since October 2009. Food prices rose 0.1% in April following the 0.3% March decline and were 2.5% higher than a year earlier, an increase from 2.2% in the previous month.
The core measure, which excludes the prices of the eight most volatile components of the CPI, posted a 0.4% increase, faster than March's 0.2% gain. The April increase was also larger than the 0.2% increase seen a year earlier and as a consequence, the annual rate picked up to 2.1% from 1.9% in February to just a shade above the Bank's 2% target.
The upward surprise in core prices was mainly the result of an outsized gain in the "homeowners' maintenance and repairs" component, which jumped 4.8% in the month and added 0.1 percentage point to the increase, while prices for the purchase of passenger vehicles moved up 1.2% and contributed another 0.1 percentage point to the core rate.
The upward surprise in CPI in April puts core inflation modestly above the updated profile provided by the Bank of Canada in last month's Monetary Policy Report that takes into account "a gradual reduction in monetary stimulus over the projection horizon." As such, today's report provides support to our view that the Bank will start the gradual process of removing policy support toward the end of this year; our forecast calls for a 25-basis-point rate hike in October.
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