the inflation fight is almost over

The latest release of Consumer Price Index (CPI) data from Statistics Canada, will be the final update on inflation in Canada prior to the Bank of Canada’s next interest rate announcement on June 5th. And not only did the headline rate of inflation decline (to 2.7%) in April after a deceiving uptick in March, there were plenty of other indications that inflation continues to moderate–setting up a potential interest rate cut in June.

Once again, the biggest contributor to inflation is mortgage interest costs, which ironically are both significantly influenced by the central bank’s monetary policy and inherently disinflationary. On the latter point, when you spend more to service your mortgage, you spend less on everything else. The overall rate of inflation for everything except mortgage interest is now below the Bank’s 2% target (at 1.8%) and has been within the target range in 11 out of the past 12 months.

Of course the Bank of Canada monitors a lot more in its assessment of how inflation is evolving and specifically it cares a lot about core measures of inflation, which strip out the most volatile components of the index. In its April 10th announcement the Bank noted “While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained. Governing Council is particularly watching the evolution of core inflation…”. Since making that statement there have now been two CPI data releases, and in both all core measures of inflation declined further. CPI Median and CPI Trim (which are generally the Bank’s preferred measures of core inflation) have both declined back within the target range of 1-3% at 2.6% and 2.9%, respectively, suggesting that the downward momentum has indeed been sustained.

While the most recent Labour Force Survey data release showed robust job gains in April (90,000), the unemployment rate held steady last month as job gains were once again the product of population growth and not a tightening labour market. Overall, inflation has been back within the Bank’s target range for four consecutive months and is trending downward while the unemployment rate remains above 6% nationally. There is now an abundance of evidence that the economy has responded to the high interest rate environment, inflation has been tamed, and the time is ripe to begin loosening monetary policy.