TD Securities analysts note that Canadian Consumer Price Index (CPI) rose 0.9% m/m in March, lifting annual inflation to 2.4% y/y, driven mainly by higher gasoline and transportation costs. However, core measures, including inflation excluding food and energy and the Bank of Canada’s (BoC) preferred metrics, softened. They expect above-trend headline inflation to persist temporarily but sees the BoC maintaining a cautious, patient policy stance.

Energy-driven CPI masks softer core

"Looking at the bigger picture, we look for the above-trend headline inflation prints to continue into the early Spring as the impact of high energy prices continues to reverberate through the economy."

"However, the Bank of Canada has taken a very cautious approach to the energy price spike, and has clearly signalled that it can look through the initial inflationary shock as long as longer-term inflation expectations are well anchored."

"The March CPI data ought to reinforce that view, as xFE inflation moved below 2.0% y/y and the share of the basket sitting above 3.0% y/y actually fell in March."

"We are also seeing weak momentum in the Bank's preferred core inflation metrics - as the 3-month annualized pace of core inflation sits comfortably below target at 1.6%."

"All told, today's print is consistent with the Bank repeating its cautious tone at next week's interest rate announcement."

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