Banks’ interest rate paths are clouded, despite rising core inflation, despite falling titles
Canada’s annual inflation fell to 1.7% in April, down from 2.3% in March, as energy prices fell. However, basic price pressures remain firm, increasing uncertainty about the next move by the Bank of Canada.
The country’s annual inflation decline is largely due to sharp declines in energy prices (-12.7%), with gasoline (-18.2%) and natural gas (-14.1% y/y, -18.9% m/m) leading. Statistics Canada pointed out that the decline in gasoline prices was mainly due to clearing consumers’ prices.
The annual slowdown in inflation is partially offset by rising travel prices at grocery stores (+6.7%) and higher food costs (+3.8%).
However, CPI did not include 2.9% of energy in April, growing from 2.5% in March, pointing to basic price pressures. Canadian banks’ preferred inflation measures (CPI Trim and median CPI) also outline the ticking effects, reaching 3.1% and 3.2% respectively.
Economists largely viewed the April CPI report as a masking deeper concern about the title decline. “The maximum inflation appears to provide probation, but the details of the report suggest that potential inflationary pressures are being taken.” TD’s Andrew Hencic said.
Food prices rose sharply in April, causing a rise in core inflation, which rose to 3.8% from 3.2% in March.
Douglas Porter of BMO pointed out that the impact of tariffs began to show in specific categories, especially food and vehicle costs.
“At the beginning of the year, the weaker loonie, tariffs on some U.S. imports have added together to drive grocery prices northward,” Porter said. “One area that is reflecting the pressure of the trade war, vehicle prices rose 0.9% m/m, increasing the annual rate to nearly 3%, and those prices fell 0.1%.
BOCs are in trouble between tariff-driven inflation and weak job market
As tariff-related pressure began to surface in Canada’s CPI data, April’s employment report showed signs of weakness, with economists saying the BOC’s tightening combined.
Porter sees two different forces in the data: a drop in energy prices and a rising core inflation driven by tariffs. While he hopes both disappear over time, he noted that Canadian banks still face challenges, with their preferred core measures operating more than expected.
“This leaves the Canadian Bank as their two main core measures are now running at their fastest pace in a year, and before they start to lower the rates, they are back,” he wrote. “After a weak job report handed to the bank was a good reason for a cut, this core backup is over 3% and can almost be washed out.”
That said, given the weak economic outlook for stores in 2025, Porter believes there will be more tax cuts this year, but the BOC may take more time to do so.
TD’s Hencic is more specific, calling the latest inflation data “a setback for BOCs”, which complicates the path to cut speed.
“But the labor market has slowed rapidly as the Canadian government provides temporary probation on certain tariffs, we believe central banks will have enough room to provide two more cuts this year, providing more support for the rapid loss of momentum of the economy.”
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Last modified: May 20, 2025
