Canada’s annual inflation rate slowed to 1.7% in April, down from 2.3% in March, as energy prices tumbled. However, underlying price pressures remained firm, adding uncertainty to the Bank of Canada’s next move on interest rates.
The country’s annual inflation decline was largely driven by a steep drop in energy prices (-12.7%), with gasoline (-18.2%) and natural gas (-14.1% y/y, -18.9% m/m) leading the way. Statistics Canada noted that the decline in gasoline prices was primarily due to the removal of the consumer carbon price.
The slowdown in annual inflation was partially offset by rising travel tour prices (+6.7%) and higher food costs at grocery stores (+3.8%).
However, CPI excluding energy rose 2.9% in April, up from 2.5% in March, pointing to renewed underlying price pressures. The Bank of Canada’s preferred inflation measures—CPI trim and CPI median—also ticked up, reaching 3.1% and 3.2%, respectively.
Economists largely view the April CPI report as masking deeper concerns beneath the headline decline. TD’s Andrew Hencic said this: “Top line inflation seemingly offered a reprieve, but the details of the report show that underlying inflation pressures picked up.”
Food prices rose sharply in April, contributing to the increase in core inflation, which climbed to 3.8% year-over-year from 3.2% in March.
BMO’s Douglas Porter noted that the effects of tariffs are beginning to show in specific categories, particularly food and vehicle costs.
“A weak loonie at the start of the year, and tariffs on some U.S. imports have combined to drive grocery prices northward,” Porter said. “Another area that is reflecting trade war pressure, vehicle prices rose 0.9% m/m, lifting the annual rate to almost 3%—these prices dipped 0.1% for all of 2024.”
BoC caught between tariff-driven inflation and weak job market
With tariff-related pressures beginning to surface in Canada’s CPI data and April’s jobs report showing signs of weakness, economists see the BoC in a tightening bind.
Porter sees two divergent forces at play in the data: falling energy prices and rising core inflation driven by tariffs. While he expects both to fade over time, he notes the Bank of Canada still faces a challenge, with its preferred core measures running hotter than expected.
“This leaves the Bank of Canada in a spot, as their two main measures of core are now running at their fastest pace in a year—i.e., back before they began cutting rates,” he wrote. “After a weak jobs report handed the Bank a good reason to cut, this back-up in core above 3% pretty much washes that away.”
That said, Porter views more rate cuts coming this year given the weak economic outlook in store for 2025—but the BoC may need more time to do so.
TD’s Hencic is more concrete, calling the latest inflation data “a setback for the BoC” that complicates the path for rate cuts.
“However, with the government of Canada offering a temporary reprieve on some tariffs, and the labour market slowing rapidly, we believe the central bank will have enough space to deliver two more cuts this year—adding a bit more support to an economy quickly losing momentum.”
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Last modified: May 20, 2025