Inflation in Canada dropped in April as the impact of tariffs sank in at the same time as the consumer carbon price was removed.
For many, the question in focus now is whether the Bank of Canada may actually be less inclined to cut interest rates in June than experts have been speculating.
“There is no way that the BoC should be cutting any time soon, if at all,” says Derek Holt, vice president at Scotiabank Economics.
“Despite modest (economic) slack, other forces are keeping core inflation at sticky, elevated levels even before trade war effects bite through supply chain effects.”
The consumer price index for last month showed overall prices increased by 1.7 per cent compared to April of last year, and that’s down from a 2.3 per cent year-over-year inflation increase in March. Although the results fell roughly in-line with what most economists were predicting, not all economic and financial experts are ready to celebrate just yet.
“That’s great, but the devil is in the details with this one as it so often is,” says portfolio manager and investment advisor Josh Sheluk at Verecan Capital Management.
“If you start to parse the numbers a little bit and look through to some of the adjusted measurements of CPI, you start to see that things were a little higher than expected and a little bit higher than the Bank of Canada I’m sure would like to see at this point.”
The Liberal government removed the consumer carbon price at the start of April, and many Canadians noticed one of the effects being lower prices at the gas pumps.
“April’s inflation data looks promising, but energy prices have deeply skewed the data. The price of gas plummeted 18 per cent following the removal of the consumer carbon tax,” says financial expert Shannon Terrel at NerdWallet.
“Take energy costs out of the equation and we’re looking at a 2.9 per cent bump in headline inflation — just a hair’s breadth shy of the Bank of Canada’s three per cent inflation threshold.”
How could inflation impact the Bank of Canada?
When the Bank of Canada analyzes economic data, including Tuesday’s Consumer Price Index, its governing council looks more closely at what is known as “core” inflation to gauge the underlying economic trends.
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“Core measures of inflation strip out certain elements like energy (including gas prices), but they also look at a couple of other measures called CPI trim and CPI median…and those actually came in slightly above or right around the three per cent level. And the Bank of Canada is targeting a one to three per cent range for inflation,” says Sheluk.
Last month also marked the first full month of tariffs between Canada and the United States.
RSM economist Tu Nguyen says she doesn’t expect tariffs to drive the headline inflation number higher just yet, and at the same time the impact of tariffs on Canada’s employment landscape is important to consider.
“For now, price increases associated with tariffs seem to have been kept at bay,” says Nguyen, adding “April’s job report displays warning signs of a weakening economy because of trade uncertainty.”
Canada’s labour market continues to show signs of weakness with unemployment ticking up last month, which, in theory, could add pressure for a rate cut by the Bank of Canada to allow businesses to more easily afford hiring new workers.
However, if core inflation is climbing, the central bank may be caught between a rock and a hard place.
“What we’ve seen today is the expectations of an interest rate cut for June have decreased. The market, investors, economists, etc. are disappointed in the inflation prints that we saw today,” says Sheluk.
“Markets are (predicting) as of this morning, a lower chance of a rate cut, but they still call it about a coin flip.”
The Bank of Canada is set to make its next interest rate decision on June 4.
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