Despite GST Holiday Wrap-Up, Canada’s CPI Decelerated in March

In March, the Consumer Price Index (CPI) rose by 2.3 per cent (y/y). This was lower than February’s 2.6 per cent (y/y) increase.

Insights

Even as the federal GST holiday ended, Canada’s CPI growth decelerated in March. While March’s CPI reflects the most recent full month of data with sales tax re-added to several goods, lower year-over-year prices for air transportation, travel tours, and gasoline helped ease the pace of overall price growth. Food price growth accelerated, however. This may partly reflect the pass-through of recent weakness in the Canadian dollar, which has raised import prices. The Bank of Canada’s preferred measures of core inflation, which remove volatile price changes, also remained stubbornly elevated at an average of 2.9 per cent (y/y).

In April, the average price of gasoline fell precipitously as Canada’s consumer carbon tax was repealed and oil prices weakened significantly. In next month’s CPI release, the dramatic year-over-year decline in gas prices will coincide with the upward price pressure stemming from the trade conflict with the United States. Given this confluence of policy pressures, April’s headline inflation reading won’t necessarily reflect underlying price pressures. Core inflation measures that exclude gasoline, however, will face upward pressure as some tariff costs are passed on to consumers.

The Bank of Canada remains in a tricky spot. The Bank’s next policy rate announcement is tomorrow, April 16. Interest rate policy typically needs to anticipate where the economy is headed and where the balance of inflationary pressures will land. However, given the unpredictability of U.S. trade policy, the Bank has shifted to a risk minimization approach where its focus “is less about the best monetary policy for a specific economic outlook and more about policy that works for different outcomes.” In this context, managing inflation expectations is key. In the first quarter of 2025, consumers’ inflation expectations rose abruptly following steady declines since the end of 2022. U.S. tariffs and Canadian countermeasures will add a one-time price increase to applicable goods. However, higher consumer and business inflation expectations could become self-fulfilling and spur additional price increases.