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Research Brief

Canada Inflation

April 2023

CAN Money

Inflation Continues to Slow; Positive Outlook for
Commercial Real Estate Investors Reinforced

Annual price growth shows encouraging signs. Canada’s Consumer Price Index rose 4.3 per cent year-over-year in March, the smallest annual increase since August 2021 and down from the 5.2 per cent witnessed in February. While base effects helped pull price growth down sharply in March, there were still positive indicators from the recent data release. The average three-month annualized gain in CPI-trim and CPI-median, Canada’s main measures of core inflation, fell to a 16-month low of 3.4 per cent. Although still elevated, food inflation also continued to cool, sitting at 9.7 per cent — the lowest in eight months. As a result, headline inflation may fall faster than the Bank of Canada expects and approach the target range of 1 to 3 per cent in the latter part of this year as broad-based indicators continue to suggest further price easing.

Central Bank gaining confidence. With core inflation trending down, coupled with preliminary data suggesting further declines, it appears broad-based inflationary pressures are continuing to soften. As a result, this encouraging data should provide the Bank of Canada with further confidence in its conditional interest rate pause. Nonetheless, there still remains risk that inflation will stagnate just above the desired 2 per cent, due to sticky pressures such as a tight labour market, robust growth stemming from China and the Russia-Ukraine War. With elevated interest rates continuing to work through the economy more broadly, however, price growth may ease quicker than expected as consumer purchasing power erodes further. Consequently, while an additional rate hike remains unlikely, a rate cut before 2024 also appears to be off the table.

Commercial Real Estate Outlook

Retreating inflation to aid investor sentiment. Total dollar volume transacted reached historic levels for almost all property types in the latter half of 2021 and the first quarter of 2022. As a result of record-low borrowing costs, investor enthusiasm was extremely positive as many deployed large volumes of capital in order to take advantage of robust fundamentals across the property spectrum. However, with the Bank of Canada increasing interest rates 425 basis points in under a year, price expectation gaps began to emerge between buyers and sellers. Consequently, many market participants moved to the sidelines, causing the transaction market to stall. Total dollar volume transacted decreased 42 per cent annually in the second half of last year. Nonetheless, with underlying fundamentals for almost all assets remaining extremely healthy throughout that time, coupled with interest rate uncertainty beginning to abate due to easing inflationary pressures, sales activity should pick up over the coming months as buyers emerge from the sidelines.   

Pent-up travel demand playing out across Canada. In March, travel tours inflation contributed the most to annual CPI movement, rising by 37 per cent. While this was largely driven by increased seasonal demand during the March break, travel activity remained healthy throughout the first quarter of the year. Hotel occupancy surpassed pre-pandemic levels, while the average daily rate and revenue per available room were up 16 per cent and 18 per cent, respectively. Looking forward, with international travel expected to return to 2019 levels, coupled with a relatively weak Canadian dollar, hotel demand is expected to remain stable, despite economic uncertainty. 


* Through March
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada;
Canada Mortgage and Housing Corporation; Capital Economics; CoStar Group, Inc.; Statistics Canada

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