Canada’s Inflation Falls to 1.7% in April: Carbon Tax Removal Key Factor

Canada’s yearly inflation rate fell to 1.7% in April, a notable decline driven largely by the removal of the consumer carbon tax and lower crude oil prices worldwide. The figures, released in the latest consumer price index (CPI) report, mark a significant drop from earlier months and signal a shift in inflationary pressures.

The carbon tax, which applied to gasoline and natural gas for consumers, was removed on April 1. This one-time policy change led to a sharp decline in energy-related costs. Gasoline prices fell by 18.1% year-over-year, while natural gas prices dropped by 14.1%, helping lower overall inflation.

Another major contributor to the decline was shelter inflation, which eased to 3.4%, its lowest level since 2021. Experts attribute this to reduced housing demand, partly influenced by stricter immigration policies, as well as a more balanced housing market. Slower population growth, combined with persistent high interest rates, has helped bring down both home prices and rental rates, which had been among the most stubborn components of inflation over the past few years.

Despite these positive signs, not all inflation indicators are moving in the same direction. Core inflation, which strips out volatile items like food and energy, showed signs of upward pressure. In April, both weighted median inflation and trimmed mean inflation rose above 3%, suggesting that other prices in the economy are still rising.

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Barring energy, Canada’s CPI was up 2.9% in April, compared to 2.5% in March. The increase came largely from grocery prices, which climbed 3.8%, and travel tour prices, which rose 6.7%. Restaurant prices also saw a rise of 3.6%, possibly related to retaliatory tariffs imposed by Canada on U.S. food imports in March.

While the removal of the carbon tax is expected to keep yearly inflation numbers lower throughout the summer, it will not impact monthly inflation in the future, as the change only triggered a one-time price reduction. Looking ahead, inflation trends will depend heavily on how trade tensions evolve.

If more U.S. tariffs are implemented, or if supply chain disruptions intensify as Canadian businesses diversify away from U.S. markets, inflation could rise again. On the other hand, low interest rates and a cooling housing market are expected to maintain downward pressure on inflation in the near term.

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April’s job report, which signaled a decelerating growth in the economy due to trade uncertainty, has added to expectations that the Bank of Canada will likely hold interest rates steady in June. While the recent disinflation supports a rate pause, rising core inflation may keep the central bank cautious.

Overall, April’s data presents a mixed picture: Clear progress in some areas like energy and housing, but emerging concerns in others like food and services. The next few months will reveal whether inflation can continue to slow or if new economic challenges will reignite upward pressure on prices.

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Source: The Real Economy Blog