In March, Canada’s central bank responded with a bang, crashing down with $30 billion worth of extensive counter-tariffs on U.S. products. This reaction followed the United States’ introduction of a massive 25 percent tariff on Canadian goods. The U.S. has mostly rolled back the tariff. This about face has provided a vastly improved economic picture for our neighbour to the north. Economists predict these changes, coupled with other factors, will pull the annual inflation rate down. They project it won’t get above 2.6 percent until March.
The first round of U.S. tariffs created fears of inflationary pressure on Canadian markets. The good news is the partial reversal shows a positive, emerging trend away from this zero-sum trade competition that should help ease some of these pressures. The BoC is engaged in matching some tariffs and as such has decided against additional $125 billion in counter-tariffs. This ruling reflects a deeper partnership between the two states. The U.S. has rolled back or suspended other threats of additional tariffs, adding to a considerably improved mood on monetary matters.
Further, several strong disinflationary forces are widely anticipated to push inflation trends lower. Beginning in April, this repeal of the carbon tax is projected to save consumers money. On top of that, a broad decline in crude oil prices will further contribute to getting inflation back down. In addition, a strengthening Canadian dollar should offer further counter-inflationary relief from increasing prices.
Economists are optimistic that the tariffs will have little effect on inflation rates. Specifically, they estimate the pass-through effects of the tariffs to show up only mildly in March. We’d have to see a pretty big increase in tariffs. Economist Randall Bartlett said, “We have baked in some impact from tariffs, but we believe it’s relatively modest.” This point of view exposes an all too common misconception. While tariffs do affect inflation, other economic factors usually have a much greater effect.
Bartlett was heartened by evidence of progress. He cautioned that core inflation and inflation on food are both still expected to remain strong. “We’re still looking for strength in core inflation, still looking for strength in food inflation,” he said, emphasizing that idea. That indicates that even if some inflationary pressures start to fade, other sectors of the economy could still be putting upward pressure on prices.
The Bank of Canada seems to be taking a more wait-and-see approach with interest rates. With rising economic conditions, that will probably continue to have it at least pause rates for the moment. Bartlett welcomed this strategy, noting that the Bank is “zeroed in on that in its latest round of discussions.” He indicated that the delay in full retaliation against U.S. tariffs could lead him to revise down his inflation outlook for the year.
While these are all positive trends, Bartlett stressed that inflation rates likely continue to be relatively high. It’s going to go down. Nonetheless, it’s still going to be higher than what I think the Bank of Canada is going to be comfortable with,” he said. This is great news and shows that there is still room for further progress, but risks are resurfacing that threaten to muddy the economic picture.
