Canada: Headline CPI to rise to 2.5% y/y - TDS

Analysts at TDS expect Canada’s headline CPI to rise further above target to 2.5% y/y, reflecting a 0.5% m/m gain on the month.

Key Quotes

“The latter should translate to a seasonally adjusted increase of 0.3% m/m. Energy prices should be a net positive on higher gasoline prices. We also see a boost from food prices, helped by CAD depreciation over February and March, while the food away from home category may see continued upward pressure after the Ontario minimum wage hike. Outside of food and energy, we expect shelter prices (rents and owned accommodation) to see some moderation as the tailwind from higher mortgage interest costs fades while new home price increases remains weak on the back of the pullback in the Ontario market. But outside of that, risks are generally to the upside.”

“Currency pass-through is a net positive this month given the 4% cumulative depreciation in CAD since January, boosting categories such as apparel and vehicle prices. We also eye another one-off this month in the communications category, which could reflect another jump in internet services prices. After one telecom company ended bundled discounts in January, other telecom companies have begun hiking internet prices beginning in March. The lift to headline prices could amount to a non-trivial 10bps.”

“In light of these upside risks, we expect exclusion-based core measures (ex food and energy, CPIX) to move higher in March and cannot rule out firmer trend measures given lagged effects of falling economic slack. Looking ahead, we expect headline inflation to remain in the mid-2% range largely on energy prices, whereas core inflation measures should hover closer to 2.0% rather than continue to glide much further above target.”

“FX:

• The data dump offers some conflicting signals for the loonie. Given the softening growth narrative, we think a downside miss in retail sales may offer the stronger signal. Indeed, we believe that the takeaway from the latest BoC meeting is that the growth data (not inflation) is the main driver of policy. The pullback in the ex-autos side underscores the softening in domestic demand. This is also the sector of the economy that is most sensitive to the higher rates and the debt/credit narrative.
• At the same time, a higher inflation print may not offer much support for CAD. Recall, the BoC is projecting 2.3% inflation this year and has already shown that they are comfortable with an inflation overshoot. The result is lower real rates so a higher inflation print that is unlikely to prompt much of a near-term response from the Bank and should amplify the low real rates story. In turn, we remain buyer of USDCAD dips and look for the 1.25 level to hold. The key intraday levels to watch are 1.2530 on the downside and 1.2660 on the topside.”