Economists expect end of consumer carbon price pulled down April inflation to 1.6%

Yahoo

18-05-2025

OTTAWA — Canadian motorists were paying less at the pump in April after the Liberals nixed the consumer carbon price — a move economists expect will help keep inflation around the Bank of Canada's two per cent target as tariff woes percolate.
Statistics Canada is set to release its consumer price index figures for April on Tuesday, roughly two weeks before the central bank's next interest rate decision scheduled for June 4.
As of Friday afternoon, economists expected April inflation cooled to 1.6 per cent, according to LSEG Data & Analytics.
The consumer carbon price amounted to around 18 cents per litre of gas when it was eliminated at the start of April, one of the first actions from Prime Minister Mark Carney after he took office.
The shock of removing the consumer carbon price is expected to drop headline inflation by 0.7 percentage points in April, according to calculations from the Bank of Canada's latest monetary policy report.
The central bank expects the end of the carbon price will lower the overall inflation figures by roughly that amount each month for the coming year, after which the removal of the levy will fall out of the annual comparison.
RBC expects the annual inflation figure will drop to 1.6 per cent in April, down from 2.3 per cent in March.
RBC economists Nathan Janzen and Abbey Xu said in a note to clients Friday that Canadian inflation data continues to be "distorted" by tax changes, with the carbon price removal coming after the two-month federal tax break on a variety of goods ended in mid-February.
Tu Nguyen, economist with RSM Canada, said motorists were also benefitting from a drop in global oil prices in April.
"We're expecting a slower economy in the world overall this year, and OPEC countries increased production, so that led to lower oil prices," she said.
Nguyen expects April inflation to come in "fairly close" to the Bank of Canada's two per cent target as slowdowns in shelter inflation tied to lower rents also take some steam out of the headline number.
But hopes that cheaper transportation costs would feed through supply chains might fall flat, she said, as April marked the first full month of Canada's tariff dispute with the United States.
The U.S. has imposed tariffs on Canadian steel and aluminum, with some carveouts for goods such as autos. Canada's counter-tariffs targetting billions of dollars in goods from south of the border also have some exemptions.
Nguyen argued any relief businesses got from cheaper gas costs might end up "cancelled out" by trade uncertainty as companies reorient their supply chains to either steer away from the U.S. or absorb the hit from tariffs — in either case, pushing their costs higher.
She said the trade dispute will primarily show up in the prices Canadians pay for new vehicles or certain auto parts, but she doesn't think those forces are enough to pump up the April inflation figure.
The U.S. consumer price index figures released last week showed little evidence that tariffs were pushing up prices south of the border, Nguyen added, so they're unlikely to have a drastic effect in the Canadian data.
"Because retaliation is still quite limited right now, and we do have various pauses, trade talks seem to be happening, I don't think ... the headline number would be dramatically too different," she said.
The Bank of Canada held its benchmark interest rate steady in April following seven consecutive cuts.
Governor Tiff Macklem made clear then that the central bank opted for a rate hold as it awaited more data on how the trade dispute will impact the Canadian economy.
Nguyen said signs of weakness in the labour market — Canada's unemployment rate ticked up to 6.9 per cent last month as trade-sensitive sectors such as manufacturing shed jobs — could be enough to push the Bank of Canada off the sidelines and toward additional cuts in June.
TD Bank economist Marc Ercolao said in a note to clients Friday that incoming data is "increasingly painting a picture of a slowing Canadian economy."
"From our lens, the current situation gives the BoC room to deliver another quarter-point cut to the policy rate at the June announcement," he said.
As of Friday afternoon, money markets placed odds over 64 per cent for a quarter-point cut from the Bank of Canada next month, according to LSEG Data & Analytics.
Nguyen said she expects two additional quarter-point rate cuts this year, bringing the central bank's policy rate down to 2.25 per cent.
She said she doesn't think those cuts will be back-to-back, however, as the Bank of Canada sticks to its wait-and-see approach as the trade war plays out.
This report by The Canadian Press was first published May 18, 2025.
Craig Lord, The Canadian Press