Key Takeaways
- Canada’s annual inflation jumped to 2.8% in April from 2.4% in March, according to Statistics Canada.
- Iran-war-driven higher energy costs are likely to keep inflation higher for some time, analysts say.
- With core inflation softening, the Bank of Canada may not need to raise interest rates this year.
Canada’s inflation spiked again in April, following a jump in March, primarily led by higher gas prices as the war in Iran continues to choke off global oil flows. However, muted core measures, which exclude the most volatile price categories, provided some good news, potentially allowing the Bank of Canada room to maintain rates steady through year-end, analysts say.
Canada’s Consumer Price Index accelerated to 2.8% in April from 2.4% in March, lower than the 3.2% FactSet estimate, according to the latest Statistics Canada report. Inflation was up 0.4% month over month after rising 0.9% in March, below the 0.7% FactSet estimate.
Much of the surge was driven by higher gasoline prices, which rose sharply by 28.6%, following a 5.9% increase in March, due to a supply disruption caused by the conflict in the Middle East. Another key year-over-year driver of inflation was transportation prices, which saw a 7.6% increase in April, up from 3.7% in March.
Core Inflation Measures Eased in April
The Bank of Canada’s preferred core measures of inflation—which strip out more volatile items like gasoline, groceries, and rent—came in softer than the month before. April CPI-trim dipped to 2.0% from 2.2% in March, and CPI-median edged lower to 2.1%, from 2.3% in the prior month. Core CPI, which excludes food and energy, decelerated to 1.5% from 1.9% in March on a monthly basis.
The Bank of Canada is due to make its next interest rate announcement on June 10. The Bank is widely expected to keep its policy rate steady at 2.25% as policymakers continue monitoring the effects of elevated energy prices. The Bank has kept the rate unchanged at its past four meetings, including three this year.
Following the report, the Canadian dollar slid 0.17% to C$1.37, or 0.72 US cents, while the Morningstar Canada Index fell by 0.11 percentage points to 6,016.71. Two-year government bond yields held steady at 3.04%.
April CPI Report Key Stats
- CPI rose 0.4% month over month, down from 0.9% in March.
- On an annualized basis, CPI rose to 2.8% from 2.4% in March.
- CPI-trim cooled to 2.0%, down from 2.2% in March, while CPI-median softened to 2.1% from 2.3%.
The following are excerpts from analyst commentaries on the April CPI report.
CPI Should Calm Expectations of Rate Hikes
“Looking beyond the nasty business at the gasoline pumps, this report is unambiguously soft. It appears that the sizeable and growing output gap is prompting ongoing disinflationary pressure in many other sectors. The risk is that still-rising energy prices disrupt that calming trend over the next few months. However, near-term Bank of Canada rate-hike speculation—which has ratcheted up in recent weeks—should calm on this friendly report. This cool core inflation backdrop reinforces our bias that rate hikes would be a big mistake in the current Canadian economic landscape. Still, the reality is that as long as oil prices continue to grind higher, the rate-hike chatter will remain.”
—Douglas Porter, chief economist at BMO Economics
Economic Slack Should Cushion Energy Price Shock
“Softer core measures of inflation relative to the pick-up seen in the US are partly a timing issue, as air fares in Canada are included at the time a flight is taken, and because of that, fare increases seen recently will show up to a greater extent in CPI readings over the summer. However, it is likely also a reflection of the slack that exists within the Canadian economy, placing downward pressure on inflation components that aren’t greatly affected by oil prices or transportation costs more broadly.
“Looking forward, the slack currently in the economy lessens the likelihood that the current oil price shock broadens into wider inflation pressure, and we continue to forecast that the Bank of Canada will hold its overnight rate at its current level this year.”
—Andrew Grantham, senior economist at CIBC Economics
Softer Core Price Growth Eases Pressure on the Bank to Hike Rates
“The muted pace of core price growth in April partly reflects the softness of the labor market and consumer demand, thereby reducing the pressure on the Bank of Canada to follow through with the interest rate hikes that are priced into markets for the coming months.
“The better news for the Bank was that even its preferred CPI-trim and CPI-median measures, which essentially ignore big moves in individual components, rose at a slightly below-target-consistent average pace of 0.16% m/m.”
—Stephen Brown, chief North America economist at Capital Economics
The Inflation Data Supports a Rate Pause Through Year-End
“While that’s still slightly elevated, recent price dynamics suggest that metric should continue trending lower in the months to come. The soft inflation print gives the Bank of Canada ample scope to remain patient in assessing the fallout from higher oil prices. As we’ve said before, with the economy operating with slack, higher gasoline prices may cannibalize spending in other areas, thereby keeping underlying price pressures contained. As a result, we continue to expect that Canadian central bankers will stay on the sidelines for the remainder of this year.”
—Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
CPI Reinforces Base Case: BoC to Stay on Hold in 2026
“Much of the strength in April reflected energy-related effects rather than a broad-based reacceleration in inflation across the basket. Excluding food and energy, price growth remained considerably more contained, while core inflation measures were broadly stable and continued to point to easing underlying inflation momentum.
“Upside inflation risks could build the longer energy prices remain at elevated levels, but overall the April data support our base case that the Bank of Canada will remain on hold for the remainder of 2026.”
—Abbey Xu, economist at Royal Bank of Canada
Little Evidence of Energy Inflation Seeping into the Broader Economy
“As expected, higher oil prices lifted Canadian inflation in April, but we are not yet seeing much of a knock-on effect to non-energy related goods or services. Core inflation pressures were actually softer than expected in April. There is little argument yet for Bank of Canada rate hikes here, and market pricing for rate hikes this year has come down a bit this morning.
“Oil prices have remained high in May, so energy prices are likely to keep headline inflation elevated for some time. Given a generally soft economic backdrop in Canada, we expect the effect on core prices to be more modest. Core inflation is expected to stay reasonably close to the 2% target on a year-on-year basis this year.”
—Leslie Preston, managing director and senior economist at TD Bank
