Canada's annual inflation rate cooled to 1.7% in April, down from 2.3% in March, driven largely by a sharp drop in energy prices and the temporary removal of a federal consumer carbon tax, according to Statistics Canada. While this headline figure suggests inflation is easing, underlying data revealed persistent core inflationary pressures that could complicate the Bank of Canada’s upcoming interest rate decision.
Despite the overall decline, two key measures of core inflation—CPI median and CPI trim—actually rose in April. CPI median, which reflects the mid-point change in prices across all items, increased to 3.2%, up from 2.8% in March. CPI trim, which filters out extreme price changes, climbed to 3.1% from 2.9%. Both figures marked their highest levels in over a year, signaling that price pressures remain sticky beneath the surface.
The central bank, which has paused rate changes since April 16 after a series of cuts, now faces a policy dilemma. On one hand, the broader inflation data and signs of a slowing economy suggest room for further easing. On the other, rising core inflation raises the risk of cutting too soon and reigniting price instability. Analysts now view the odds of a rate cut at the next meeting on June 4 at just 40%, down from 65% prior to the inflation report.
Energy costs helped drive the overall decline, with gasoline prices dropping 18.1% year-over-year and natural gas prices falling 14.1%. However, consumer staples saw continued upward pressure. Grocery prices rose 3.8% in April, up from 3.2% in March, and travel tour costs surged 6.7% from the same time last year. This mixed pricing landscape has left households feeling squeezed in some areas even as overall inflation eases.
TD Securities’ Andrew Kelvin noted that while current data doesn’t demand immediate rate action, growing global trade uncertainties—including unpredictable effects from U.S. tariffs—could require a flexible approach. Fiscal responses may become necessary if external shocks continue to weigh on economic growth, but balancing this against domestic inflation trends remains a key challenge for policymakers.
As the Bank of Canada prepares for its next rate decision, eyes will turn to one more major data point: first-quarter GDP figures, set for release on May 30. These numbers will help determine whether recent economic softness is enough to justify a rate cut or if the persistence of core inflation keeps the bank on hold a little longer. Meanwhile, the Canadian dollar inched higher following the inflation report, reflecting market uncertainty around the future rate path.