Canadian consumer prices unexpectedly cooled in March 2025, as prices for gasoline and travel tours fell significantly, leading to a decline in the annual inflation rate. According to Statistics Canada, the consumer price index (CPI) rose 2.3 percent from a year ago, down from 2.6 percent in February. The index increased by 0.3 percent on a monthly basis in March, which was lower than the anticipated 0.7 percent gain.
The decline in inflation comes as a relief to many Canadians, particularly with the backdrop of rising costs in various sectors. The average of the Bank of Canada’s two preferred core inflation rates decelerated slightly to a 2.85 percent yearly pace, compared to 2.9 percent in February. This indicates a slowdown in the underlying inflation pressures that the Bank closely monitors.
As of April 15, 2025, the Canadian dollar traded at 71.99 cents U.S. and dropped to its day’s low against the U.S. dollar. Canadian bonds also extended gains, with the two-year sector rallying some four basis points to 2.547 percent following the inflation data release.
The Bank of Canada is poised to make a crucial interest rate decision on April 16, 2025. Economists are divided on whether the central bank will cut rates again, as it has done for seven consecutive meetings since last June. The recent inflation figures have led traders in overnight swaps to boost bets on a rate cut to about 45 percent, up from just over 30 percent prior to the data release.
Several factors contributed to the cooling inflation, particularly the significant drop in gasoline prices, which fell 1.6 percent year-over-year in March after a notable 5.1 percent increase in February. Additionally, prices for travel tours saw a dramatic decline of 4.7 percent, while airfare costs plunged 12 percent amid softened travel demand to the U.S. from Canada. This decrease in travel is partly attributed to a consumer backlash against U.S. tariffs and political tensions, which have led many Canadians to reconsider trips across the border.
Andrew DiCapua, an economist at the Canadian Chamber of Commerce, expressed caution regarding the future, stating, "Prices are grounded for now, but that might not last. In the months ahead, we could start to see the impact of new tariffs pushing prices higher. If trade tensions continue to escalate, we’re looking at the risk of a stagflationary environment with slower growth and rising prices." This sentiment resonates with concerns regarding the ongoing trade war initiated by U.S. President Donald Trump, which has created significant uncertainty in the Canadian economy.
Katherine Judge, an economist at the Canadian Imperial Bank of Commerce, suggested that the easing in price pressures aligns with a potential 25 basis-point cut on Wednesday. She emphasized that the downside risks to growth from the trade war outweigh any inflationary pressures stemming from tariffs.
The end of the federal tax holiday in mid-February also played a role in the current inflation landscape, as March marked the first full month without this relief. This change resulted in upward price pressures for some goods, particularly food purchased from restaurants, which rose 3.2 percent from a year ago, following a 1.4 percent decline in February.
While the overall inflation figures appear promising, the impact of the trade war remains a significant concern. The Canadian government has imposed retaliatory tariffs on approximately $60 billion worth of U.S. goods, including steel, aluminum, and vehicles. These tariffs are intended to pressure the Trump administration to reconsider its trade policies, but they also pose risks of increased prices for Canadian consumers.
Douglas Porter, chief economist at BMO, noted, "After a couple of months of high-side surprises, Canadian inflation caught a serious March break, held down by much milder travel costs than normal. This speaks to the fact that the inflation impact of the trade war is more of a two-way street for Canada than the U.S., since Canada’s tariffs are so much lighter so far, while the domestic economy is under more pressure."
Despite the decline in inflation, core inflation measures, which exclude more volatile elements of the CPI, remain elevated. The CPI-median inflation held steady at 2.9 percent, while CPI-trim decreased slightly to 2.8 percent. Analysts are closely monitoring these core measures as they provide insight into the underlying inflation trends.
As the Bank of Canada prepares for its upcoming meeting, the challenge lies in balancing the risks of inflation against the potential economic slowdown caused by the ongoing trade conflicts. James Orlando, senior economist at Toronto-Dominion Bank, remarked on the delicate situation, stating, "The central bank will be weighing the inflation risk from tariffs against the downside risk coming from consumer/business sentiment surveys, a loosening job market, and a very weak real estate market."
Looking ahead, the economic landscape remains uncertain. While the March inflation report provides a brief respite from rising prices, the potential for future increases looms large, particularly if trade tensions escalate. As consumers and businesses navigate this complex environment, the Bank of Canada’s decisions in the coming weeks will be critical in shaping the economic outlook for Canada.
