Economists are forecasting that Canada’s inflation rate will drop to 1.6 percent in April. This fall is largely due to the recent repeal of the consumer carbon price. The removal of this levy is roughly estimated to lower headline inflation by 0.7 percentage points for the month. Tu Nguyen, an economist with RSM Canada, welcomed this decline as a contributor to lowering inflation figures. He wants them to return to “fairly close” to the Bank of Canada’s two percent target.
This change to the structure of carbon pricing is one of the biggest contributors to inflation. Economists expect it to drag down overall inflation numbers by an average of 0.7 percentage points per month over the next year. She said there are signs of weakness in the labor market. This would likely force the Bank of Canada’s hand in the September meeting, driving them to weigh at least one more interest rate cut—possibly as soon as June.
Canada’s unemployment rate has climbed up to 6.9 percent. Trade job losses This surge further underscores the toll taken on jobs in trade-sensitive sectors of the economy, especially manufacturing. This picture Nguyen underscores the continued turbulence in the economic waters. Recent consumer price index figures offer little in the way of evidence that tariffs are increasing prices in the United States.
To make matters worse, trade disputes between Canada and the U.S. have flared up recently. Tariffs on Canadian steel and aluminum are now hurting the very sectors Trump is trying to protect. While some exemptions—like for household goods and automobiles—are standardized, perhaps the most immediate effect of these tariffs will be on new vehicle prices and for certain auto parts.
Nguyen said this pause would greatly damage relief businesses are currently receiving from decreasing gas prices. He cautioned that this advantage could be “wiped out” by persistent trade uncertainties. He warned of the broader impacts of a cooling global economy. He said, “We’re looking at a slower global economy this year, that’s what we’re expecting. And you have OPEC countries pump more oil, depressing oil prices.”
The Bank of Canada has decided to hold interest rates this time around. It is holding out for further information on what trade disputes will do to the Canadian economy. As Governor Tiff Macklem stated in the same speech, it’s critical to understand these dynamics first before deciding how or whether to adjust monetary policy.
As of Friday afternoon, money markets were signaling a much stronger probability. They forecast more than 64 percent odds of a quarter-point cut from the Bank of Canada next month. Impact on monetary policy Nguyen now expects two additional quarter-point rate cuts later this year. If those cuts do occur, the central bank’s policy rate would fall to 2.25 percent.
Moving forward Economists are rightfully wary of inflationary trends and the market reaction. Beyond basic administrative shifts, the removal of the carbon price will profoundly change how we compare inflation from year to year. This turn of events would have serious implications for future U.S. monetary policy decisions.
