- Headline inflation slowed to 0.4%

- Bank of Canada's measure remained sticky but still fell below target

Headline inflation fell to 0.4% in April, down from 1.2% in March. While prices have fallen much quicker than markets expected, this was mostly an energy story. Energy prices were down 17.5% from a year ago, the sixth consecutive decline as consumers paid less for gasoline, fuel oil, and electricity. Excluding energy, prices were a bit more sticky, rising 2.4% as food prices continued to weigh on consumers' wallets. This kept the Bank of Canada's core measure relatively firm at 1.8%, although still below the Bank's target of 2.0%.

Excluding food, prices were down 1.1% from a year ago, as households paid less for just about everything else. More specifically, growth in shelter costs slowed sharply to a meager 0.2%, down from 2.0% in March, and the slowest growth in over 6 years. This is a nice break as the combination of falling energy prices and mortgage interest costs have eased up price pressures consumers have been feeling when the monthly bills come in. Consumers also continued to enjoy large discounts at retailers, as the price of goods fell 5.5%, the sharpest decline on record. Moreover, the cost of purchasing and leasing a motor vehicle is now at the cheapest level in over 15 years.

Given the amount of slack building up in the Canadian economy, we can expect price pressures to continue to ease as headline inflation dips into negative territory in 2009. Food prices have been the main source of inflationary pressures for some time now. This was largely the impact of higher input costs for farmers who were paying more for everything from fertilizer and feed to machinery and equipment. As these input price pressures abate food price growth should also soften. Excluding food, there are no foreseeable price pressures in the near future, and we expect overall prices to decline through the rest of 2009. Retailers will have to continue offering discounts to attract buyers, and a strengthening Canadian dollar will help put further downward pressure on prices. With little concern over inflation, the Bank of Canada can focus on kick starting the flailing domestic economy by maintaining the overnight rate at the effective lower bound for some time.