PM spotlight

Steve Morris, CFA, Senior Managing Director & Portfolio Manager

Steve’s take: “As of March, Canadian headline CPI increased 0.5% month-over-month, matching market consensus, while the year-over-year increase decelerated to 4.3% (figure 1). The path for year-over-year inflation from now until June will be biased lower as high CPI prints from last spring create strong base-year effects.”

Food purchased from stores accounts for 1.1% of the 4.3% year-over-year inflation (figure 2). This category remains a top contributor to year-over-year inflation. However, food prices continue to show signs of deceleration, increasing 0.2% month-over-month, which is the lowest month-over-month increase since June 2022.

Owned accommodation had a 1.1% contribution to year-over-year inflation. Homeowners’ replacement costs decelerated, reflecting a general cooling of the housing market, while mortgage interest costs accelerated.

Private transportation has a near-zero contribution to year-over-year inflation. Gasoline prices decreased 13.8% year-over-year, the largest year-over-year decrease since July 2020. This was primarily due to strong base-year effects, as steep price increases occurred in March 2022 following Russia’s invasion of Ukraine.

Figure 1: CPI Change

Figure 1

Figure 2: Canada headline CPI contribution year-over-year

Figure 2

Steve’s take: “We continue to monitor real return bond (RRB) markets through ongoing discussions with dealers. There continues to be an active secondary RRB  market, although declining liquidity has resulted in volatility in pricing from dealers.”

Figure 3: Breakeven inflation rates

Figure 3

Breakeven inflation rates were volatile over the quarter (figure 3) as RRB markets have been increasingly driven by technical factors and less based on market participants’ inflation expectations, given the diminishing liquidity of the sector. Generally, dealers have observed more active selling of off-the-run RRBs as some of the longer term holders look to exit the sector. Consequently, in the current market environment it may be easier to buy, rather than sell, off-the-run RRBs.

Although only Canadian federal RRBs can guarantee Canadian purchasing power under all inflation scenarios, some level of protection can be obtained with other types of inflation-linked securities (figure 4). Investors looking to hedge both CPI and break-even inflation while minimizing currency and foreign interest rate mismatch risk may wish to use U.S. TIPS with cross currency swaps. Additionally, other asset classes that are not directly inflation-linked but have historically exhibited some inflation sensitivity, such as real estate, infrastructure, or equities, may provide some inflation protection while potentially introducing market risk.

Figure 4: Types of inflation-linked securities

Inflation-linked security type


Federal real return bonds

Direct link with Canadian CPI, excellent hedge of break even inflation

Provincial real return bonds

Similar benefits to Federal RRBs with provincial spread, limited market (Quebec, Ontario, Manitoba)

Corporate real return bonds

Similar benefits to Federal RRBs with corporate spread, limited market (3 public issuers, 1 private issuer)


Correlated with Canadian CPI, good hedge of breakeven inflation; introduces currency and foreign interest rate mismatch risk

U.S. TIPS with cross currency swaps

Hedges currency and foreign interest rate risk of U.S. TIPS; adds swap spread pickup and swap spread volatility

CPI-linked derivatives

Limited market for Canadian CPI

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CPI change (figure 1)

12-month, YTD, and MoM change in the Statistics Canada Consumer Price Index, monthly, not seasonally adjusted (Table 18-10-0004-01)

Canada headline CPI contribution year-over-year (figure 2)

Bank of Canada Consumer Price Index Portal

Breakeven inflation rates (figure 3)


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