Bank of Canada faces dilemma as core inflation heats up

The Bank of Canada seen through the west gate of Parliament in Ottawa. The central bank decides on interest rates June 4. Photo by Sean Kilpatrick/The Canadian Press

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Headline inflation slowed in April mainly due to drop in gasoline prices because of the elimination of the federal carbon tax, but it was a different story for the measures the Bank of Canada follows.

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Statistics Canada said Tuesday the main reading on the consumer price index (CPI) decelerated to 1.7 per cent year over year just ahead of analysts’ estimates of 1.6 per cent and down from 2.3 per cent in March.

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Gas prices fell 18.1 per cent in April, also helped by lower oil prices, pushing the overall inflation rate below the Bank of Canada’s two per cent target for the first time since January.

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However, the central bank’s preferred measures — core CPI median and trim, which strip out the effects of taxes — accelerated to 3.2 per cent and 3.1 per cent year over year from 2.9 per cent and 2.8 per cent, respectively.

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April’s results boost those measures above the top end of the Bank of Canada’s inflation target range of three per cent.

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Here’s what economists think the numbers mean for the central bank and its upcoming interest rate decision on June 4.

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‘Bit of a box’: Rosenberg Research

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“The Canadian inflation numbers for April were hotter than expected, which comes as a surprise to a wobbly economy replete with employment loss and widening spare capacity in the labour market,” David Rosenberg, founder of Rosenberg Research and Associates Inc., said in a note, pointing to the pickup in core inflation.

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Rosenberg also said “it was disappointing” to see a jump in the core reading that excludes food and energy, which has risen in four of the past five months.

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The “staycation” trend was the main source of the underlying increase in inflation as travel services rose 8.7 per cent in April month over month. Recreation services and restaurants also benefited from the stay-at-home movement.

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“This places the Bank of Canada in a bit of a box,” he said.

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‘Strain on the economy’: Capital economics

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The latest CPI data shows that “underlying inflation pressures still pose a threat,” said Thomas Ryan, North America economist with Capital Economics Ltd.

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Stripping out gasoline, the rate of inflation stepped up to 2.9 per cent year over year from 2.5 per cent.

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Prices rose for airfares, motor vehicles, with the latter taking a hit from retaliatory tariffs — and food prices.

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“While this level of underlying inflation is still too high for the Bank of Canada’s comfort, the bank’s mostly dovish tone in April suggests it is more focused on economic risks,” Ryan said.

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Capital thinks the Bank of Canada will cut its rate again in June after pausing in April because weak employment and housing data point to “growing signs that U.S. tariffs are putting strain on the economy.”