The Bank of Canada has been walking a tightrope with inflation as the latest data turns everything on its head. In April, inflation fell suddenly and unexpectedly to just 1.7 percent. This drop was primarily the result of a sharp short-run decline in gasoline prices following the cessation of the consumer carbon price. The underlying inflation dynamics tell a different, more complex story that has economists and policymakers on edge.
The drop in gasoline prices was the key factor in headline inflation concerns continuing to ameliorate. As the consumer carbon price came to an end, the effect could be felt right away, playing a major role in Canada’s strong inflation rate. While this is all great news, core inflation figures have developed into something of a boogeyman, coming in over three percent. This difference is evidence that at least part of inflation continues to let up. Everything else remains solid and may be building upward price pressures.
Just last week, Tiff Macklem, Governor of the Bank of Canada, warned about the potentially distorting effects on the inflation data. He called attention to the “strange volatility” in the numbers. He emphasized that it is still unclear if these trends are cyclical, meaning they would be temporary, or if they have the potential to last long-term.
“There is some unusual volatility. So how temporary or persistent this is, I think remains an open question,” – Tiff Macklem
Just this week, new data showed that inflation—that is, price increases—without taxes included, hit 2.3 percent in April. This was a surprise to the Bank of Canada. Food inflation, too, has shot up these past months, heavily affected by outside forces affecting prices. At the start of 2023, the Canadian dollar dropped considerably. The compounded effects of this decline are now being felt on food prices, fueling overall increasing cost of living across the board.
The indirect effects of counter-tariffs by Canada in the food sector have raised costs for American consumers on such goods. As discussed above, these tariffs introduce yet another layer of complexity to the increasingly complex inflation landscape, introducing noise in the data that makes analysis more difficult.
The termination of the consumer carbon tax played a big role in dragging down April’s year-on-year inflation rate. The calm in overall inflation streaks suggests what current trade wars with the United States could do to shape local prices. Economists are concerned that tariffs may begin to exert upward pressure on broader categories of goods, potentially exacerbating already high core inflation figures.
Katherine Judge, an economist at CIBC, highlighted this connection between tariffs and inflation:
“The acceleration in the monthly pace will be largely tied to food prices that are picking up counter-tariff impacts and core goods prices that could begin to reflect broader tariffs,” – Katherine Judge
Economists are closely monitoring these developments. Other forecasters are looking for a tick-up in the inflation rate. Promisingly, they expect it to be around 1.8 percent year-over-year for last month, largely thanks to a confluence of factors. One-time price declines as well as ongoing increases in food and core inflation will be determinative. In any case, they will play a critical role in shaping future monetary policy decisions.
David Reitzes, an economist at BMO Capital Markets, emphasized that the Bank of Canada evaluates multiple metrics when assessing inflation trends.
“The reality is, they don’t just look at one number. They look at a number of different inflation metrics to really try and figure out what the underlying trend is,” – Reitzes
As the Bank of Canada plans its next steps, it needs to take these contradictory signals into consideration. As the central bank undertakes this delicate balancing act, it will remain vigilant. It does so against a backdrop of all the right encouraging signs, but of some deeply troubling pressures.
