Inflation at its lowest in 19 months

For the fifth month in a row, inflation slowed in March to 4.3%. At the grocery store, the average price increase fell below 10% for the first time since December 2022, but food is still very expensive.

The increase in the Consumer Price Index (CPI) in March is the lowest since August 2021. In Quebec, inflation is at 4.7%, which is slightly higher than the national average. Year over year, households paid more for mortgage interest and less for gasoline, which had risen significantly a year ago.

At the grocery store, prices rose at an annual rate of 9.7% in March, compared to 10.6% in February, mainly due to the slowdown in the rise in the price of fresh fruits and vegetables. The price of grapes and oranges, for example, fell, as did the price of cucumbers and celery, according to Statistics Canada.

Why is food inflation still so high?

The price of food depends on a host of factors, including supply chain disruptions, bad weather, rising input costs, labor shortages and rising wages. “Contrary to past trends, many of these conditions and pressures have occurred simultaneously,” says Statistics Canada, which cites two major causes that have led to the widespread rise in food prices: rising oil prices and rising grain prices following the invasion of Ukraine.

“There are always risks on the offer [alimentaire], but the trend is encouraging, says Marc Desormeaux, senior economist at Desjardins. The price of food [dont ceux achetés au restaurant] increased by 8.9%, a slower pace than the previous seven months,” he notes.

At the grocery store, the annual price increase rose from 10.6% to 9.7%, which is still high, “but the last two months are encouraging,” he said.

What explains the decline in headline inflation?

Headline CPI inflation stood at 4.3%, down from 5.2% in February. This is the smallest increase for 19 months. It is also the first time since the start of 2020 that the key rate, currently 4.5%, is higher than the rate of inflation. Price increases slowed in food, housing and furniture.

The slowdown in annual inflation is also explained because the prices of March 2023 are compared to those of March 2022, which were very high due to the invasion of Ukraine by Russia. Oil, for example, topped US$120 a barrel in March 2002 while trading around US$80 a barrel last month.

The year-over-year decline in energy prices contributed the most to the drop in the headline inflation rate.

Core inflation, which does not take energy and food prices into account, is also showing signs of easing. Excluding food and energy, prices rose 4.5% year over year in March, following a 4.8% increase in February.

Excluding the cost of mortgage interest, which is rising sharply due to the rise in interest rates, inflation is even more moderate, at 3.6%.

Can the Bank of Canada say mission accomplished?

Certainly not. At 4.3%, the CPI is still more than double the Bank of Canada’s target rate of 2%. The slowdown in the rise in prices, however, is encouraging the Bank of Canada to extend its pause in raising interest rates to wait for them to have their full impact on the economy.

Inflation should continue to slow and reach 3% in the summer, forecasts the central bank. It’s a very likely scenario, according to National Bank economists, who believe the price of goods will continue to moderate thanks to smoother supply chains, price cuts from Chinese producers and weaker global demand. . “The proportion of companies facing labor shortages has fallen sharply,” note Matthieu Arseneau and Alexandra Ducharme, which should ease the pressure on wages and inflation in services.

Could interest rates drop soon?

On this, opinions differ. For National Bank economists, inflation will approach the target at the end of the year and the work of the Bank of Canada is done. “Easing could begin in the last quarter of the year,” they argue.

“The Bank of Canada could start cutting rates at the end of the year, even if inflation has not yet returned to target, because the economy will have slowed enough,” believes for its part the Desjardins economist, Marc Desormeaux.