On the surface, the latest inflation report brought welcome news: Canada’s annual inflation rate slowed to 1.7% in April. This drop below the Bank of Canada’s 2% target would normally have markets buzzing about an imminent interest rate cut.
However, a closer look at the data reveals a much more complicated picture, clouding the path for a Bank of Canada (BoC) rate cut and leaving homeowners with variable-rate mortgages in a state of suspense. The devil is truly in the details, and the key detail is core inflation.
The Tale of Two Inflations: Headline vs. Core
While the headline inflation number looked promising, it was almost entirely due to a sharp drop in energy prices. The real story lies in the numbers the Bank of Canada watches most closely.
- Headline Inflation: Dropped to 1.7%, largely thanks to an 18.2% fall in gasoline prices.
- Core Inflation: When you strip out volatile components like energy, the picture changes. The BoC’s preferred measures of core inflation—CPI-trim and CPI-median—actually rose to 3.1% and 3.2% respectively.
This is a significant problem. As TD economist Andrew Hencic noted, “Top line inflation seemingly offered a reprieve, but the details of the report show that underlying inflation pressures picked up.” This persistent, underlying inflation is what will keep the Bank of Canada cautious.
What’s Pushing Core Prices Higher?
The increase in core inflation wasn’t random. It was driven by price hikes in essential areas that Canadians feel every day.
- Rising Food Costs: Grocery prices continued their upward march, rising 3.8%.
- Tariff Impacts: Economists are now seeing the effects of trade tariffs show up in consumer prices, particularly for food and vehicles.
- Travel Costs: Prices for travel tours also saw a significant jump of 6.7%.
BMO’s Douglas Porter pointed out that these core measures are now at their fastest pace in a year—back before the BoC even began cutting rates.
The Bank of Canada’s Tightrope Walk
This report puts the Bank of Canada in a very difficult position. It’s caught between two powerful, opposing forces:
- A Reason to Cut: A weak April jobs report signaled that the economy is losing steam and could use the support of a rate cut.
- A Reason to Hold: The surprising strength in core inflation makes it very difficult to justify lowering rates, as this could fuel further price increases.
Porter perfectly summarized the dilemma: “After a weak jobs report handed the Bank a good reason to cut, this back-up in core above 3% pretty much washes that away.”
What This Means for Your Mortgage and Future Rate Cuts
For anyone with a variable-rate mortgage or waiting for borrowing costs to come down, this report is a dose of cold water.
- A June Rate Cut is Now Less Certain: Hopes for a rate cut at the Bank of Canada’s next announcement have been significantly dampened. The BoC will likely want to see clear evidence that core inflation is also on a firm downward trend before acting.
- Patience is Required: While economists still believe rate cuts are coming in 2025 to support a slowing economy, the timeline has become hazier.
- Focus on Your Financial Plan: This uncertainty reinforces the need for a solid household budget. For those with variable-rate products, it’s crucial to ensure you can handle your payments if rates stay higher for longer than anticipated.
Ultimately, while the headline inflation number offered a glimmer of hope, the stubbornness of core inflation has put the Bank of Canada in a bind and put a question mark on the timing of much-anticipated rate relief.