Central bank may view an April increase in core measures as cause for alarm
Canada’s inflation rate slid to 1.7% in April – but a surprise increase in core prices could be a concerning development for the Bank of Canada as it weighs up whether to cut interest rates this summer.
Statistics Canada said on Tuesday that inflation cooled last month in 2.3% in March, although that drop was almost entirely because of the end of the consumer carbon price at the beginning of April.
While Canadians saw relief at the pump, inflation excluding energy costs jumped to 2.9% in April, a month-over-month increase of 0.4%. Mortgage interest costs rose by 6.8% compared with the same time last year, while rent prices were up by 5.2%.
The ongoing US-Canada trade war may have contributed in part to higher prices for groceries and motor vehicles, Royal Bank of Canada (RBC) economists Nathan Janzen and Abbey Xu said, but costs for domestically produced services such as rents, food purchased from restaurants, and travel tours also leaped.
Retaliatory tariffs by Canada on US goods will have a “limited” impact on consumer prices in the months ahead, Janzen and Xu said, while scrapping the carbon tax could keep inflation around the Bank of Canada’s 2% target into early 2026.
Still, April’s stubborn inflation reading could give it pause for thought on potential summer rate cuts. “Our own base case expectation has been that a softening economic growth backdrop will ultimately push the BoC to cut the overnight rate down to 2.25% in the summer… after skipping a reduction in April,” Janzen and Xu wrote.
“But the central bank will need to balance that pessimistic growth outlook with inflation pressures – and the latest upside inflation surprise means it could well now take downside economic growth surprises to justify further cuts.”
Bank of Montreal (BMO) chief economist Doug Porter also suggested the central bank was now “in a spot” with measures of core inflation beginning to gather pace. “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,” he wrote.
“Given a weak growth outlook for much of 2025, we continue to expect further rate reductions, but the Bank may need more time to gain comfort in the inflation outlook.”
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