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Removal of Canada’s Carbon Tax Knocks CPI Growth Down

Canadian Economics

By: Kiefer Van Mulligen

In April, the Consumer Price Index (CPI) rose by 1.7 per cent (y/y). This was lower than March’s 2.3 per cent (y/y) increase.

  • Gasoline prices fell by 10.2 per cent month-over-month and were 18.1 per cent lower than a year ago. Food prices rose by 3.8 per cent (y/y) following a 3.2 per cent increase in March.
  • Core CPI (excluding food and energy) grew by 2.6 per cent in April (y/y), higher than its 2.4 per cent increase in March. Several shelter components continue to drive overall CPI growth.
  • On a seasonally adjusted basis, the CPI fell by 0.2 per cent from the previous month (following a 0.1 per cent decline in March).
  • The average of the Bank of Canada’s two preferred core inflation measures rose to 3.2 per cent (y/y) in April. CPI-median rose to 3.2 per cent from 2.8 per cent in March, while CPI-trim increased to 3.1 per cent (from 2.9 per cent in the previous month).

Key insights

The removal of the consumer carbon tax reduced inflation considerably in April. Year-over-year, consumer prices in Canada grew by 1.6 per cent in the month, a marked deceleration from the March’s reading. Combined with lower oil prices, the elimination of the consumer carbon tax throughout most of Canada (except for Quebec, where the cap-and-trade system remains in place) was the primary driver of the CPI’s deceleration in April. The impact of the carbon tax removal will continue to reduce headline inflation by about 0.7 percentage points through March 2026.

Since the slowdown in April’s headline CPI growth was largely caused by a policy change, it doesn’t accurately reflect where consumer prices are headed. Core inflation, which strips out the most volatile price changes each month, rose in April. The Bank of Canada’s preferred measures of core inflation rose above the Bank’s inflation target in April, which may impact the Bank’s next interest rate decision on June 4. The labyrinthine system of U.S. tariffs and Canadian countermeasures is adding upward pressure to inflation. This pressure is reflected in higher prices for food and motor vehicles, among other goods and services, and will become more apparent in near-term CPI data.

For more details about the impact of U.S. tariffs on inflation and the Canadian economy, please consult our economic impact analysis.

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