Canada’s population is surging but it isn’t producing much demand for goods and services. Statistics Canada (Stat Can) data shows the Consumer Price Index (CPI) slowed in February. Weaker demand from households is allowing supplies to rise and taming price growth. The rapid deceleration has led to an unusually large gap compared to the US.
Falling Phone & Internet Bills Were Enough To Drive Inflation
Canadian CPI came in much lower than anyone anticipated. The monthly price advance was 0.3% in February, with prices 2.8% higher than last year. Down from the 2.9% annual growth reported in January, showing notable progress towards the central bank’s 2 point target.
The largest downward pressures on annual growth included phone bills (-20.5%), internet services (-13.2%), and homeowner replacement costs (-1.4%). Stat Can attributes the decline in the first two factors to promotions offered by service providers, as well as increased mobile phone data—a good reminder that hedonic adjustments are included in addition to the sticker price paid.
Upward pressure was created by mortgage interest (+26.3%), which is high but lower than last month. The indicator is finally heading in the right direction. It was followed by rents (+8.2%) and restaurants (+5.1%).
Canadian Core Inflation Suddenly Plunges, Much Lower Than US
Most surprising is the slowing price growth wasn’t just headline CPI, it was also seen in Core CPI. Core CPI spiraled down to 2.8% as well, shaving off a mind-blowing 0.6 points in just one month. This measure is preferred by the Bank of Canada (BoC) due to its lack of volatility, but that seems fairly volatile.
“What really stands out is the growing gap between the U.S. and Canada on this measure of underlying inflation,” says Douglas Porter, chief economist at BMO.
US Core CPI showed annual growth of 3.8% in February, a full point higher than Canada. “This widening gap, which may be due to softer underlying spending growth in Canada, is a solid argument for the BoC leading the Fed on the rate cut front,” he explains.
How long the divergence can last will be interesting. Falling interest rates in Canada would lead to weakness against the US dollar, which most commodities are priced in. As a result, the currency weakness can become an inflationary pressure on its own.
