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By Promit Mukherjee
OTTAWA (Reuters) -Canada's annual inflation surprisingly slowed in March to 2.3%, three notches below the prior month, largely helped by lower gasoline and travel tour prices, data showed on Tuesday.
The lower than expected number on inflation slightly increased the chances of a rate cut on Wednesday, although the majority in the market still tilted towards a pause as economists were divided on the course for monetary policy.
The core measures of inflation, which are closely tracked by the Bank of Canada and strip off volatile items, however, stayed elevated, Statistics Canada said.
"Does (the bank) look in the rear view mirror at still relatively sticky core inflation, or does it look forward knowing that the consumer and business sentiment has crumbled and the economy is likely to weaken in this quarter? That's a tough call," said Doug Porter, chief economist at BMO Capital Markets.
"I don't think anyone's going to question their wisdom if they decide to trim tomorrow," he said.
The BoC will announce its monetary policy decision on Wednesday and currency markets have trimmed their bets for a pause in its interest rate cutting cycle to around 52% from 60% before the data was released.
U.S. President Donald Trump's tariffs on a variety of Canadian imports and Canada's retaliatory measures are expected to increase prices but also suppress economic growth, putting the central bank in a bind on whether to cut or increase rates.
On a month-on-month basis, inflation rose by 0.3%, Statscan said.
Analysts polled by Reuters had expected the year-on-year inflation rate to remain at 2.6%, and on a monthly basis to rise by 0.6%.
The rate of increase of consumer prices in Canada has shown signs of acceleration after seven months of staying at a level of 2% or below.
A sales tax break from mid-December to mid-February helped mask the actual price increases. This was evident in the price increase of food and alcoholic beverages, which reversed a previous contraction and jumped in March.
Food prices rose by 3.2% and alcoholic beverages increased by 2.4% on an annual basis.
But this increase was largely offset by a deceleration of 1.6% in the price of gasoline. Without gasoline, the consumer price index rose by 2.5% in March, Statscan said.
"The decline was largely a result of lower crude oil prices amid concerns of slowing global oil demand and slowing economic growth related to the threat of tariffs," the statistics agency said.
Year over year, prices for travel tours declined 4.7% in March and air travel costs fell 12.0%. The drop in air travel prices coincided with decreased Canadian trips to the United States, Statscan said.
The Canadian dollar was trading down 0.28% at 1.3911 to the U.S. dollar, or 71.89 U.S. cents. Yields on two-year government bonds dropped 4.2 basis points to 2.537%.
One of the core measures of inflation, CPI-median - or the centermost component of the CPI basket when arranged in an order of increasing prices - was at 2.9% in March, same as the prior month.
The other core measure CPI-trim, which excludes the most extreme price changes, slowed a tad to 2.8%, Statscan said.
(Reporting by Promit Mukherjee and Dale Smith; Additional reporting by Fergal Smith and Anna Mehler PapernyEditing by Mark Porter and Emelia Sithole-Matarise)
