CPI Cools to 2.7%: Does This Mean Rate Cut June 5th?

Update on Inflation Rate

Canada’s annual inflation rate cooled to 2.7 percent in April, according to the latest Consumer Price Index (CPI) report from Statistics Canada. This deceleration in inflation is a significant shift from previous months and has raised expectations that the Bank of Canada (BoC) might start cutting interest rates as early as June. The slower growth in prices for food, services, and durable goods was a major factor in this reduction. However, the rise in gasoline prices, which increased by 6.1 percent in April compared to a 4.5 percent increase in March, moderated the overall slowdown.

Why the Inflation Rate is Down

The decrease in the inflation rate can be attributed to several factors. Firstly, the growth in prices for food, services, and durable goods has slowed down. This is a welcome relief for consumers who have been facing high costs for essential items over the past few years. For instance, grocery prices, which significantly influence the CPI, have shown signs of stabilization. Meat prices increased by 1.8 percent, dairy products by 1.2 percent, and fresh fruit prices fell by 4.4 percent. These changes have helped to decelerate the overall inflation rate.

Secondly, the measures of core inflation, which exclude volatile items like food and energy, also showed a cooling trend. The CPI-median fell from 2.9 percent in March to 2.6 percent in April, and the CPI-trim decreased from 3.2 percent to 2.9 percent over the same period. This consistent reduction in core inflation over the past few months suggests that the underlying inflationary pressures are easing.

Does This Mean the Bank of Canada Will Cut Rates?

Given the latest data, there is increasing speculation that the Bank of Canada will cut interest rates in June. The central bank has maintained its benchmark interest rate at 5 percent since June of last year. However, with inflation showing signs of sustained deceleration, there is a stronger case for a rate cut.

Bank of Canada Governor Tiff Macklem has indicated that the central bank needs to see sustained progress on inflation, particularly in core measures, before making any changes to the policy rate. With four consecutive months of data pointing to tame underlying inflation, analysts believe that the BoC now has the evidence it needs to start reducing rates.

Royce Mendes from Desjardins noted that the Canadian central bankers should have the evidence required to begin easing monetary policy, while BMO’s chief economist Douglas Porter mentioned that the door is open for a rate cut, though it might be gradual and cautious. Dominique Lapointe from Manulife Investment Management also echoed this sentiment, stating that the slowdown in inflation cements the case for a June cut.

Overall, while the market remains somewhat hesitant to fully commit to a rate cut in June, the latest inflation data strengthens the argument for the Bank of Canada to start a gradual easing cycle in its upcoming policy announcement.

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