Getting to 2% Inflation

 

The March inflation numbers registered an annual increase of 4.3%, down from 5.2% in the prior month. Core inflation also moderated by 3-to-4 tenths on a year-over-year basis with median inflation moving to 4.6% from 4.9% and trim to 4.4% from 4.8%. All signs suggest that inflation is heading to 3% in the months ahead with most short-term metrics in the low-3% range.

Shelter inflation remains high with mortgage interest costs up 26.4% year-over-year, and up from 23.9% in February. With the cooling housing market, homeowners’ replacement costs are down to only 1.7% year-over-year, down from nearly 15% in late 2021. The Bank is likely to look through this component of inflation.

Goods inflation is decelerating faster than service inflation. Inflation for durable goods was down to 1.6% in March, as prices for furniture fell. Services inflation remained above 5% in March.

The Bank has made it clear they want to get to the 2% inflation target. Their credibility would be called into question if they said anything less. Is a policy rate of 4.5% sufficiently restrictive given these inflation trends? We expect the Bank will be patient in its approach. They are not likely to raise rates higher, but the overnight target rate will likely remain stuck at 4.5% until the end of the year as services inflation remains sticky. 

Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.