• Top-level consumer prices fell 0.1% in March—the first monthly price decline since July 2009.
• Core prices fell 0.3% in the month, according to both the Bank of Canada measure of core inflation and the more standard measure of core inflation (excluding food and energy).
• Top-level inflation rose at a year-on-year (y/y) rate of 1.4% in March, a deceleration from 1.6% in February.
• The Bank of Canada's measure of core inflation decelerated to 1.7% y/y, from the sharp rise of 2.1% in February.
• The more conventional measure of core inflation (excluding food and energy) decelerated to only 0.9% y/y, down from 1.4% in February.
• Within the transportation category, gasoline prices edged higher, and are now up by 17.2% y/y.
• Passenger vehicle prices declined in March, but are still up on a yearly basis.
• Overall inflation was tempered by declines in clothing and footwear, down by 2.2% y/y, and shelter, down 0.7%.

Outlook

Canadian inflation pressures moderated substantially in March, as top-level prices actually dropped by 0.1%, while core prices plunged 0.3%.

The core rate of inflation (excluding food and energy) declined from 1.4% year-on-year (y/y) in February to only 0.9% in March, not far off the core inflation rate of 1.1% in the United States.

The sharp decline in the core rate was related to a sharp pullback in the recreation, education, and reading price index, mainly due to a decline in traveller's accommodations prices after the Winter Olympics. Passenger vehicle prices also fell after seeing several months of relatively strong gains related to the 2010 model year changeover.

In the Bank of Canada's latest Monetary Policy Report, released on April 22, the Bank estimated first-quarter 2010 inflation at 1.7% y/y, a touch higher than the actual 1.6% climb reported on April 23. Likewise, the Bank's special estimate of core inflation was estimated at 2.0% y/y, a bit stronger than the 1.9% actual reported today.

The Canadian dollar, which had shot upward to exceed parity earlier this week in response to recent hawkish comments from the Bank of Canada, dropped back down by about a half a cent to just below parity in response to the very tame inflation data.

Canadian inflation is well contained, aided by the sharp run-up in the Canadian dollar. Core inflation (excluding the impact of food and energy) rose by 0.9% y/y in March, while U.S. prices increased 1.1%. Moreover, top-level inflation in Canada is running at a yearly rate of 1.4%, much more subdued than 2.3% in the United States.

Bottom line: Canadian inflation pressures moderated significantly in March, mainly as many of the temporary distortions to prices from the Olympics reversed out of the numbers. Inflation trends in Canada are running below those in the United States, aided by the sharp rise in the Canadian dollar since the end of 2008. Thus, there is no immediate pressure or rationale for the Bank of Canada to commence a monetary tightening cycle. The Bank may make some technical upward adjustments to the bank rate in the June to September period, but we do not expect any material moves by the Bank to move rates higher in the next few months.