Canada's all-items inflation rate rebounded in April to 1.7%, posting the first rise in the year-over-year rate since November 2007. The Bank of Canada's core inflation rate, CPIX, also edged higher, to 1.5% from 1.3% in March. On the month, the all-items index rose 0.8% in April relative to March, double market forecasts for a 0.4% increase, while the CPIX rose 0.3%, faster than market forecasts calling for the level to remain unchanged.

The monthly increase in the all-items index reflected higher energy prices with gasoline costs rising, while reduced incentives for vehicles limited the decline in this component. Prices for food (0.8%), shelter (0.9%) and transportation (2%) posted increases in April, while clothing prices registered a 1.8% decline.

On a year-over-year basis, gasoline prices, which stood 11.6% higher than in April 2007, were the biggest contributor to April's 1.7% rise. Prices of other fuels also firmed, jumping 36.9% relative to a year earlier. Mortgage interest costs also contributed to April's stronger-than-expected annual rise, with rising new house prices putting upward pressure on the component rather than interest rates.

Homeowners' replacement costs saw a slightly slower pace of increase and were up 4.6%. Even though passenger vehicle prices were 6.6% below year-ago levels, the pace of decline slowed from March's 7.1% pace. Women's clothing prices were 6.7%, lower than a year earlier, which weighed down the clothing and footwear component - this component posted a 1.8% monthly decline and was 3.5% below the April 2007 level.

Both the core and all-items inflation rates are broadly tracking the Bank of Canada's forecasts, with the Bank projecting an average 1.7% rate in the second quarter, while at 1.5%, the core measure is running slightly faster than the Bank's 1.3% projection.

With March's mixed bag of indicators suggesting that the economy grew at a sub-potential pace again in the first quarter and inflation largely tracking the Bank's expectations, we look for policymakers to trim the overnight rate by 25 basis point in the months ahead to ensure that policy is stimulative enough to sustain the domestic economy in the face of a widening trade drag. Future easing will likely be limited, however, given recent encouraging signs that suggest the U.S. economy will avoid recession and growing indications that credit market strains are starting to ease.

FOMC minutes to be released later today
The minutes of the April 29-30 FOMC meeting, to be released at 2:00 pm today, will flesh out the details of the Fed's decision to cut the policy rate by 25 basis points. This was the least aggressive action taken since the beginning of the year. In the April 30 press release, policymakers dropped the phrase "downside risks to growth remain", instead choosing to emphasize the "substantial easing of monetary policy" that had been undertaken to promote growth, essentially shifting from an overt easing bias to more of a passive one. The minutes will illuminate the reasoning behind this shift.

One likely explanation is that, after using a wide array of measures to combat the credit crunch, it was unclear how much help cutting the Fed funds rate was providing compared to alternative measures of boosting liquidity, such as the TAF auctions. Note that the Fed will be releasing its new growth and inflation forecasts. Upward and downward bumps to the inflation and growth profiles, respectively, seem likely.