Inflation likely rose in March, but not enough to change Bank of Canada's direction

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Canadian inflation likely reaccelerated in March, but not by enough to throw the Bank of Canada off course, economists say.

Markets are forecasting that inflation rose to three per cent last month, following a surprise slowdown to 2.8 per cent year over year in February. Last week, the United States reported that inflation south of the border picked up speed in March.

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“The Bank of Canada will be focused on the March Canadian consumer price index report next Tuesday after another upward surprise in U.S. price growth created doubt about the U.S. Federal Reserve’s rate-cutting plans this year,” Royal Bank of Canada economists wrote in note last week.

RBC’s Nathan Janzen and Abbey Xu expect year-over-year price growth to hit three per cent, largely due to higher gasoline prices pushing energy costs further above year-ago levels.

While slower price growth in recent months would have made Bank of Canada policymakers confident that inflation will continue to slow, the central bank wants to see more evidence before shifting to interest rate cuts, the economists said.

“After decelerating by more than expected so far this year, inflation likely picked up again slightly in March,” said CIBC Capital Markets economist Andrew Grantham, who is forecasting the rate to hit 2.9 per cent in March.

While inflation may have heated up slightly, it’s unlikely to offset all of the progress seen in the first two months of the year, he added.

This means the widely expected June interest rate cut from the Bank of Canada is still within the realm of possibility, he said, noting that the central bank’s CPI-trim and CPI median measures of core inflation likely continued to ease.

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Analysts at National Bank of Canada also expect the increase in March gasoline prices to translate into a 0.7 per cent gain for the headline index before seasonal adjustment, forecasting the 12-month rate to rise to three per cent from 2.8 per cent.

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Scotiabank economist Derek Holt said he thinks there is a solid risk of a rebound in the trimmed mean and weighted median measures, and is forecasting three per cent year-over-year growth in headline CPI.

Holt said that as far as the central bank is concerned, he would set a higher bar for easing than two to three months of data and would want to assess many other considerations regardless of Tuesday’s outcome.

“It’s absolutely crazy that it has come down to this level of data sensitivity at the BoC,” Holt said. “Most of what they said in their communications and forecasts made it sound like they were in no rush to cut.”

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