Headline inflation in Canada slowed in April, mainly due to a drop in gasoline prices, following the elimination of the federal carbon tax. The overall consumer price index (CPI) decelerated to 1.7% year-over-year, just ahead of analysts’ expectations of 1.6%, and down from 2.3% in March.
Key Insights on CPI Measures
Gas prices fell 18.1% in April, aided by lower oil prices, which pushed the overall inflation rate below the Bank of Canada’s 2% target for the first time since January. However, the central bank’s preferred measures — core CPI median and trim — accelerated to 3.2% and 3.1% year-over-year, up from 2.9% and 2.8% respectively. These increases push core inflation above the Bank of Canada’s target range of 3%.
Economic Impact and Bank of Canada’s Dilemma
The surprise increase in core inflation presents a challenge for the Bank of Canada, as underlying inflation pressures remain high. According to David Rosenberg of Rosenberg Research, the core CPI reading, excluding food and energy, has risen in four of the past five months, primarily driven by the “staycation” trend and higher costs in recreation services and restaurants. This raises questions about future interest rate policies.
Inflationary Pressures and Economic Strain
Thomas Ryan, North America economist at Capital Economics, also noted that stripping out gasoline, inflation rose to 2.9% year-over-year, up from 2.5%. The rise in airfares and motor vehicle prices, impacted by retaliatory tariffs, further indicates strain on the economy. Despite these pressures, Capital Economics expects the Bank of Canada to cut its interest rate in June, citing weakening employment and housing data linked to U.S. tariffs.
Desjardins Forecasts Rate Cut
Royce Mendes from Desjardins Group suggested that while the slowdown in headline inflation, driven by the carbon tax elimination, may not be a long-term concern for the Bank of Canada, the acceleration in core inflation remains a significant issue. Mendes expects that inflation expectations will stabilize, with upcoming surveys likely showing a reversal of the earlier spike in inflation expectations. This, combined with economic weakness, suggests the Bank of Canada will likely proceed with a 25 basis point rate cut in June.
Outlook and Implications for Rate Policy
The Bank of Canada’s next rate decision, scheduled for June 4, will take into account the ongoing inflation pressures and the broader economic slowdown. Mendes revised his forecast for the terminal rate to 2%, up from 1.75%, reinforcing the need for monetary stimulus in the near term, despite the slight cooling of inflation.
