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Canada's inflation rate cools to 2.7 per cent in April, likely giving BoC 'all clear' for June rate cut

A new report from RBC says the cost of filling a grocery cart is finally stabilizing, but don't expect food prices to go back to pre-pandemic levels. People shop in a grocery store in Montreal, Wednesday, November 16, 2022. THE CANADIAN PRESS/Graham Hughes
Canada's annual inflation rate increased 2.7 per cent in April. (THE CANADIAN PRESS/Graham Hughes) (The Canadian Press)

Canada’s annual inflation rate slowed to 2.7 per cent in April and measures of core inflation also eased, Statistics Canada said on Tuesday, increasing the odds that the Bank of Canada will start cutting interest rates in June.

In its scheduled release of the Consumer Price Index (CPI) Tuesday, Statistics Canada said that the deceleration was driven by slower growth in prices for food, services and durable goods. The slowdown was moderated by rising gasoline prices, which increased 6.1 per cent in April compared to a 4.5 per cent increase in March. Excluding gasoline, the CPI increased 2.5 per cent per cent in April.

The results were in line with analyst expectations, according to Reuters. Money markets increased bets for a rate cut in June to around 50 per cent, up from 39 per cent before the data was released.

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"Today's data should have provided the all clear on the inflation front that the Bank of Canada needed to start cutting interest rates in June," CIBC economist Andrew Grantham wrote in a research note on Tuesday.

April’s CPI report is a crucial one for the Bank of Canada, as it is the last major data report released before the central bank's June 5 rate announcement. Bank of Canada governor Tiff Macklem said last month that the central bank needs to see evidence that progress on inflation is sustained, particularly in core inflation.

"Since then we have received two more months of data pointing to tame underlying inflation, for a total of four in a row, and because of that we continue to forecast a first rate cut at the next meeting in June," Grantham said.

In March CPI ticked up to 2.9 per cent, but measures of core inflation cooled. Measures of core inflation eased again in April, with CPI-median falling from 2.9 per cent in March to 2.6 per cent in April, while CPI-trim fell from 3.2 per cent in March to 2.9 per cent in April.

Desjardins managing director and head of macro strategy Royce Mendes said in a research note on Tuesday that "Canadians look likely to get a small dose of rate relief in the coming weeks."

"With headline inflation decelerating to 2.7 per cent in April from 2.9 per cent in March and core measures also moving in the right direction, Canadian central bankers should have the evidence they need to begin easing monetary policy," Mendes wrote.

"While the market still seems somewhat hesitant to fully commit to a rate cut in June, we see the latest inflation data as enough for the Bank of Canada to begin a gradual easing cycle at its next policy announcement."

The Bank of Canada has held its benchmark interest rate at 5 per cent since June of last year. While Macklem said last month that a June cut this year was "within the realm of possibilities", the central bank needs to be assured that the slowdown in inflation "is not just a temporary dip."

"The key question for the BoC is whether inflation has tamed sufficiently to now start reducing the degree of restrictiveness," BMO chief economist Douglas Porter wrote in a research note on Tuesday.

"We believe that the door is open for a BoC rate cut, and we have been leaning to June move for the past six months. But it remains a close call, and when the Bank does eventually move, it will be gradual with a highly patient Fed acting as a limiter on how far and how fast Canadian rates can fall."

Dominique Lapointe, director of macro strategy for Manulife Investment Management, said that the slowdown in inflation "cements the case for a June cut."

"Combined [with] an economy in oversupply (according to the BoC itself), weak private sector employment gains, business investment intentions and slower consumption, we think this morning's CPI print should provide enough evidence for the BoC to cut, starting in June," Lapointe wrote in a research note.

On a monthly basis, CPI increased 0.5 per cent in April. Seasonally adjusted, CPI rose 0.2 per cent.

Grocery prices led the deceleration in the CPI in April, Statistics Canada said, with prices increased 1.4 per cent. Meat prices were up 1.8 per cent, dairy products up 1.2 per cent, fresh fruit prices fell 4.4 per cent while bakery products saw prices remain flat (0 per cent change) compared to last year.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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