The March inflation numbers registered an annual increase of 4.3%, down from 5.2% in the prior month. Core inflation also moderated by 3-to-4 tenths on a year-over-year basis with median inflation moving to 4.6% from 4.9% and trim to 4.4% from 4.8%. All signs suggest that inflation is heading to 3% in the months ahead with most short-term metrics in the low-3% range.
Shelter inflation remains high with mortgage interest costs up 26.4% year-over-year, and up from 23.9% in February. With the cooling housing market, homeowners’ replacement costs are down to only 1.7% year-over-year, down from nearly 15% in late 2021. The Bank is likely to look through this component of inflation.
Goods inflation is decelerating faster than service inflation. Inflation for durable goods was down to 1.6% in March, as prices for furniture fell. Services inflation remained above 5% in March.
The Bank has made it clear they want to get to the 2% inflation target. Their credibility would be called into question if they said anything less. Is a policy rate of 4.5% sufficiently restrictive given these inflation trends? We expect the Bank will be patient in its approach. They are not likely to raise rates higher, but the overnight target rate will likely remain stuck at 4.5% until the end of the year as services inflation remains sticky.
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