Thank you, Chair.
Canadian inflation is coming down after peaking at 8.1% last June, the highest rate in four decades. Data released this week showed the annual change in the CPI at 5.2% for February, and more progress looms. Some of this will be due to base effects. In the wake of Russia's invasion of Ukraine, last spring it exhibited the biggest three-month surge in prices in 40 years, at 11.6% annualized, and this won't be repeated this spring. Indeed, the latest three-month trend is running under 2% annualized.
However, the latest figures are being flattered by lower energy prices. Looking at underlying or core inflation, whether measured by the CPI-median, the CPI-trim or the CPI excluding food and energy, the yearly changes are all tucked just under 5%, and importantly, the latest three-month annualized changes are running in the 3% range. The latter are much closer to the 2% target, but further progress is still required.
Fundamentally, inflation continues to run at an above-target pace, and it accelerated in the first place because of an imbalance between demand and supply in the domestic and global economies.
After the onset of the pandemic, the demand for commodities and commodity prices was initially depressed, but it eventually recovered, in some cases quite sharply. This trend was exacerbated by Russia's invasion of Ukraine. It also didn't help that extreme weather and disease were impacting global agricultural supply.
There was a surge in the demand for goods, partly because you couldn't spend on services owing to restrictions. The strong demand butted against global supply chains that were still reeling from the pandemic, resulting in shortages and distribution backlogs. This caused many goods prices to spike.
Then, as the Canadian economy reopened, there was a surge in the demand for services, but many service providers were constrained by lack of labour. This caused some services' prices to spike, with the resulting increased demand for workers applying upward pressure on wages amid the lowest unemployment rate in half a century. Overall, Canadian demand was so strong that businesses were able to pass their higher labour and other input costs on to their customers.
Facing these mounting inflation pressures, the Bank of Canada began tightening monetary policy a year ago to dampen demand in the economy so that supply could catch up, and it's catching up.
After eight consecutive rate hikes and a cumulative 425 basis points of tightening, the Bank of Canada paused earlier this month. Monetary policy works with a lag, and the bank was keen not to weaken demand more than is necessary to restore price stability. We expect the pause will continue for the rest of this year.
Nevertheless, there's a significant chance that the Canadian economy will still see a downturn under the weight of monetary tightening, given near record-high household debt burdens. However, we judge any downturn will be mild, given the support provided by $350 billion of excess savings amassed by households, lingering pent-up demand, particularly for services, and a sturdy labour market. As for inflation, we expect the annual changes to be in the 3% range by the end of this year, down from around 5% currently, and well on track for 2%.
Finally, with President Biden visiting Ottawa today, it's worth mentioning how America's fight against inflation compares. The annual change in the U.S. CPI was 6% in February, down from its 9.1% peak last year. U.S. core inflation was 5.5%, but the three-month trend is proving to be more stubborn than Canada's, and is still running in the 5% range. Definitional differences account for some of this, but demand south of the border is proving to be more resilient in the face of Federal Reserve tightening. As such, yesterday, the Fed raised policy rates another 25 basis points, and we expect one more rate hike this spring. Given what will be 500 basis points of cumulative tightening, and the recent headwinds coming from banking sector stress, the U.S. economy is more likely to suffer a mild downturn this year, which will weigh on the Canadian outlook. We also expect U.S. inflation readings in the 3% range by year end, as in Canada.
That concludes my comments. Thank you. I would be pleased to discuss this further in the Q and A.