REAL ECONOMY BLOG | March 21, 2023

Canada’s inflation plunged to 5.2% from 5.9% on a year-ago basis in February as comparisons to last year’s elevated numbers kicked in, Statistics Canada reported on Tuesday.

Prices spiked during the same period last year because of supply chain disruptions and the war in Ukraine.

Inflation also slowed compared to a month ago, declining to 0.1% from 0.3% on a seasonally adjusted basis.

That was good news especially with the three-month moving average falling to slightly above 0.1% in February.

Tuesday’s data certainly helped to support the Bank of Canada’s decision to pause its tightening policy early to assess the lagged impact of its 450 basis points in rate increases since the beginning of last year.

While the Canadian financial system has been somewhat less exposed to the recent banking crisis in the United States and in Europe, the spillover of the crisis onto recession fear and spending should keep price pressures, especially energy, import and export prices, lower. Oil prices have fallen in recent weeks as the crisis plays out in real time.

But that does not mean that inflation concerns will go away anytime soon as the core measure of inflation—the weighted median and the trimmed mean, which control for the volatility in price changes—remained elevated compared to the target level. Those rates declined to only 4.9% and 4.8%, respectively.

We expect inflation to fall to the 3% to 4% range in the second half of the year as a recession most likely takes place, with inflation nearing 3% barring any unexpected shocks.

Inside the data

On a yearly basis, inflation slowed the most in the food and transportation categories, down to 9.7% from 10.4%, and to 3.1% from 5.4%, respectively.

Shelter inflation, which accounts for roughly 30% of total spending, was down to 6.1% from 6.6% previously, continuing to reflect the cooling of the housing market.

Most of the decline in yearly inflation also came from energy as energy prices dropped by 4.7% compared to an increase of 2.9% in the prior month.

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