The current economic landscape in Canada is showcasing significant shifts that are influencing pricing trends and expected inflation readings. Economists surveyed by Reuters forecast that the annual inflation rate for March will hold steady at 2.6 percent, mirroring the figure recorded in February. This persistent inflation is attributed to several economic pressures, including a weaker Canadian dollar, which is affecting import costs, rising food prices, and the initial impact of tariffs.
According to Randall Bartlett, deputy chief economist at Desjardins Group, core inflation remains robust along with food inflation. The ongoing trade tensions have exerted upward pressure on inflation in certain sectors, such as the depreciation of the loonie, while simultaneously alleviating pressure in others, like lower economic confidence and commodity prices. For instance, the price of oil traded below US$70 per barrel in March, notably down from approximately US$80 per barrel during the same month last year.
Overall, the influence of tariffs on inflation is predicted to be modest for March, primarily because Canada has not yet implemented most of its proposed retaliatory tariffs. Bartlett indicated that although some impact from tariffs is anticipated, it is expected to be limited. In early March, the federal government introduced around $30 billion in counter-tariffs on U.S. goods in response to a 25 percent tariff imposed by the U.S., which was later partially reversed. Additionally, Canada initiated another $30 billion in counter-tariffs mid-month as a reaction to U.S. metal tariffs. However, a further $125 billion in counter-tariffs has not been enacted due to the suspension of some U.S. tariff threats.
While the reduction in counter-tariffs contributes to maintaining lower inflation levels, the U.S. decision to delay the broad implementation of tariffs on Canadian goods could potentially encourage spending, despite ongoing price pressures. Bartlett anticipates that this delay will lead him to lower his inflation projections for the year, even though inflation is expected to remain higher than what the Bank of Canada would deem acceptable.
The Bank of Canada is scheduled to announce its next interest rate decision on Wednesday, following the release of the latest inflation figures. Douglas Porter, chief economist at BMO, noted that the Bank faces a "delicate" balancing act given the multitude of factors at play, including the ongoing federal election. He predicts that March's inflation reading will not be favorable, estimating it to be around 2.7 percent, but he also emphasizes that the Bank can take comfort in the anticipation of a significant drop in April’s inflation figures. Factors such as the removal of the carbon tax in April, a decline in crude prices, and a stronger Canadian dollar are expected to contribute to this downward trend.
Moreover, the Bank of Canada will have to consider inflation expectations, which have risen for the first time since 2022, according to a recent survey. This suggests that inflation expectations have shifted markedly higher than what many analysts had anticipated. Consequently, Bartlett believes that the Bank of Canada will likely keep interest rates unchanged. He remarked that the central bank will need to "keep some powder dry" for potential adverse economic conditions.
Real estate trends, including falling rents and weakening home sales and prices, are also expected to alleviate some inflationary pressures. The interest rate cuts already enacted should help mitigate the impact of climbing mortgage costs on consumers.
