CAD: Energy-driven CPI spike keeps BoC cautious – TD Securities

TD Securities strategists expect Canada’s March Consumer Price Index (CPI) to accelerate as higher energy prices lift the headline rate, while food disinflation offsets some of the impact. Core measures are seen rising but remaining contained, leaving the Bank of Canada’s (BoC) April communication broadly unchanged despite the recent Oil shock and Iran-related geopolitical tensions.

Energy lifts headline, core stays contained

"Headline CPI is set to accelerate to 2.5% y/y in March as prices rise 1.1% m/m, underpinned by the sharp increase for energy (market: 2.6% y/y, 1.1% m/m). Gasoline and other energy products should contribute ~0.7pp to the headline print (m/m), while a sharp deceleration for food products provides a key offset to the larger contribution from energy."

"We do not expect large spillovers from energy prices to core inflation, with CPI-trim/median forecast to rise 0.2% m/m and hold at 2.3% y/y. That would still mark the largest m/m increase since October, with 3m core inflation rates set to jump from 1.0% to 1.7%. However, we don't think that's enough for the Bank of Canada to change its messaging in April after pledging to look through the near-term impact of higher oil prices."

"The Q1 Business Outlook Survey and Survey of Consumer Expectations will provide a closer look into business/consumer sentiment ahead of the April Bank of Canada meeting when published on Monday. However, these surveys will be more backward looking than usual given most interviews would have taken place before the US strikes on Iran and subsequent increase to global energy prices."

"So while BOS/CSCE may reveal some further normalization of firm-level/consumer inflation expectations, we do not expect any impact on the Bank of Canada's deliberations in April. We also look for a mildly dovish tone across other BOS components as the unwind of recent labour market gains and pullback in Q4 GDP take some pressure off capacity indicators."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)