Inflation rate drops to 1.7% in April, driven by lower energy prices after carbon tax removal

Canada's inflation rate eased to 1.7 per cent in April, driven by a drop in prices after the federal government removed the consumer carbon tax, according to Statistics Canada.

The slowdown came after the inflation rate hit 2.3 per cent in March. Lower crude oil prices were also a factor in the decline, the data agency said. 

Despite the decline in headline inflation, core inflation measures all rose in April, some above three per cent — well above the Bank of Canada's two per cent target rate.

The central bank watches those numbers closely because they strip out volatile sectors and don't factor in one-offs like the removal of the carbon tax.

"The big relief from lower gasoline prices in April masked an unfriendly inflation picture beneath the surface. Some of that upswing in underlying prices appears related to the simmering trade war," BMO chief economist Douglas Porter wrote, noting a flare-up in the cost of groceries and autos.

"After a weak jobs report handed the Bank a good reason to cut, this back-up in core above 3 [per cent] pretty much washes that away," Porter wrote.

The central bank is set to make its next interest rate decision on June 4. Porter still expects that the Bank of Canada will cut, given the outlook for weak economic growth in 2025, but said the bank might need more time to see how inflation plays out.

Pump and shelter prices down, grocery prices up

As the divisive carbon tax ended, gasoline prices took a nosedive, dropping 18.1 per cent in April compared to a year earlier. Natural gas prices fell 14.1 per cent during the same period, StatsCan noted.

Tu Nguyen, an economist at RSM Canada, wrote that shelter also put some downward pressure on inflation last month.

"Slowing demand due to stricter immigration policies have led shelter inflation to slide to 3.4 [per cent], the lowest since 2021," Nguyen wrote.

"Shelter prices are expected to remain cool in the next few months as interest rates stay low and the housing market becomes more balanced."

Even as consumers paid less at the pump and housing inflation simmered down, groceries were more expensive in April, increasing 3.8 per cent year-over-year compared to 3.2 per cent in March. Grocery inflation has now outpaced overall inflation for three months in a row.

Fresh veggies, fresh and frozen beef, coffee and tea, plus sugar and other sweets contributed the most to the rise in store-bought food prices — and restaurant meals also got more expensive last month, the data agency said.

"The big bump in core [inflation] was driven heavily by food prices, which have been running hot on a seasonally adjusted basis in the past three months," Porter wrote.

"A weak loonie at the start of the year, and tariffs on some U.S. imports have combined to drive grocery prices northward."