We forecast total CPI to fall 0.8% month over month in March, below the -0.4% consensus. The non-essential business shutdowns have likely led to a decline in six out of the eight major CPI categories (see table).
First and foremost, the transportation category is expected to remove 0.7 ppt from total CPI, driven by a large 20% drop in gasoline prices.
Second, the plunge in tourism activity weighed down heavily on the CPI travel services subcomponent (hotels) part of the “recreation, reading and education” category.
The range of economists’ estimates for this release is large, from 0.0% to -0.9%. It reflects a high degree of uncertainty tied to the large swings in some specific subcomponents and the methodology. For instance, we notice a significant drop in airfares at the beginning of the month, followed by a strong rebound when the number of flights was restricted because of COVID-19. It is unclear how Statistics Canada will integrate airfares, but we expect Canadian airfares to fall similar to what we observed in the U.S. CPI March report released on April 10. Other CPI subcomponents in the March data are also difficult to gauge as consumers stop spending on many items. The identification of prices was also difficult due to companies’ closures.
Food is the only major CPI category where prices likely increased; contributing 0.1 ppt. The cost of imported fruits likely soared due to the depreciation of the Canadian dollar. Also, prices of several food items rose due to the sudden surge in consumer stockpiling, even if there is no immediate risks of massive disruptions in the food supply chain. Vegetable prices actually fell in the U.S., a reliable indicator of Canadian prices.
Food CPI is one of the rare categories where Canadians were able to continue spending on despite the non-essential business shutdowns. The same logic applies to other items. For instance, a 20% drop in gasoline prices does not really reduce the cost of living since car traffic plummeted. Thus, if Statistics Canada keeps the same weights in the CPI basket, which is our expectation, total CPI may not reflect the real change in the cost of living due to the rapid and forced shifts in consumers’ habits (to be considered by RRBs holders).
Total CPI inflation near zero or slightly negative in April
If our -0.8% m/m estimate turns out to be right, total CPI inflation will fall like a stone: from 2.2% y/y in February to 0.7% in March. Gasoline prices fell by an additional 19% so far in April. Accordingly, total CPI inflation could move closer to 0.0% or slightly into negative territory in a month from now when Statistics Canada will publish the April CPI report.
Once the total CPI inflation print for April is out, we would be tempted to fade any persistent deflationary fears. Total CPI inflation could bottom out in April as the foreign exchange pass-through tends to increase over time on imported items, generating upward pressures on CPI subcomponents, such household furnishings and equipment. Also, the gradual reopening of the global economy should contribute to bring CPI inflation moderately above 1% in 2020 H2.
Overall, we forecast total CPI inflation to average 0.9% in 2020 and 1.7% in 2021. Of course, the degree of uncertainty surrounding these point estimates is very large. Markets will need to monitor supply disruption/destruction in key components such as energy and the rebound in consumer demand post-virus.
Dominique Lapointe contributed to this report.