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Canadian Inflation Falls Further, Bolstering June Rate Cut Odds

Canadian headline inflation decelerated again last month, and the underlying price indicators followed most closely by the Bank of Canada continued to weaken – helping clear the way for a rate cut in June. Data released by Statistics Canada this morning showed the Consumer Price Index rising 2.7 percent on a year-over-year basis in April, down from the 2.9 percent increase recorded in March, and closely aligned with consensus expectations. On a month-over-month basis, prices increased 0.5 percent.

Shelter costs again provided the biggest lift, with rents climbing 8.2 percent year over year, while mortgage interest costs rose 24.5 percent.

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 2.75 percent over the same period last year, down from the 3.05 percent average in the prior month. The older “CPI-X” measure, which excludes eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products) as well as the effect of changes in indirect taxes on the remaining components, climbed 1.6 percent over last year, down sharply from 2 percent previously. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

Swap-implied odds on a Bank of Canada rate cut at the June meeting are rising beyond the 50-percent threshold, sending the Canadian dollar sharply lower against the greenback.

Bottom line: With all major inflation aggregates, including the Bank of Canada’s preferred measures, now tracking within the central bank’s target range, the stage is set for a first rate cut in June. A “dead cat” bounce is playing out as last year’s easing in financial conditions translates into more borrowing, home-buying, and household spending, but it is clear that economic downside risks should now outweigh inflation in determining policy settings. The Canadian dollar could remain under selling pressure until the US joins the country in exhibiting signs of a slowdown.

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