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Canadian Inflation Slows Sharply, Clobbering Loonie

Canadian headline inflation decelerated faster than expected 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 by June. Data released by Statistics Canada this morning showed the Consumer Price Index rising 2.8 percent on a year-over-year basis in February, down from the 2.9 percent increase recorded in January, and well below consensus expectations set closer to 3.1 percent. On a month-over-month basis, prices increased 0.3 percent – also undershooting market forecasts for a 0.6 percent gain.

Shelter costs again provided the biggest lift, with rents climbing 8.2 percent year over year, while mortgage interest costs rose 26.3 percent.

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 3.15 percent over the same period last year, down from the 3.35 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 just 2.1 percent over last year, down from 2.4 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 by June are rising, weighing on the Canadian dollar as traders bet on a faster and more aggressive easing cycle. Last year’s yawning gap between US and Canada rate expectations has narrowed, with both central banks now expected to deliver roughly three rate cuts through the back half of the year, but the Canadian economy’s greater sensitivity to elevated borrowing costs continues to put pressure on the belly of the curve, keeping the exchange rate suppressed.

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