On April 1, the retail carbon tax was eliminated, resulting in sharply lower gasoline and natural gas prices. The tax cut was large enough to put a dent in Canada’s overall inflation rate last month.

The consumer price index rose only 1.7% year-over-year (y/y) in April, the smallest increase since September 2024. Looking at the main carbon tax components, gasoline prices dropped 18% y/y (with an assist from lower oil prices) while natural gas prices were down 14% over the last year.

How can we be so sure this was a carbon tax impact? First, excluding energy costs, the inflation rate remained elevated at 2.9% y/y. Second, excluding indirect taxes (where carbon taxes are captured), inflation accelerated to 2.3%. Finally, the only province with faster price growth was Quebec, where the federal elimination of the carbon tax had no impact due to that province’s cap and trade system.

Looking beyond the direct carbon tax impacts, food prices (+3.8% y/y) accelerated driving inflation higher. Shelter is still running warm at 3.4%, but the shelter component is adding less and less to inflation each month as mortgage interest costs continue to rise at a slower rate.

More concerning, core prices using the two common ‘trend’ metrics (trim and median) rose above 3% y/y last month.

What’s next for the Bank of Canada?  It’s complicated.

For the Doves…

Those less concerned about inflation can point to a softening labour market, slower wage growth, and expectations that the economy will remain in a rough patch. Sure there are tariff pressures, but they are not as bad as originally feared. They can also note that, whatever the source, headline inflation is near target. Further, shelter costs are adding less and less to the inflation rate each month.

For the Hawks…

The inflation worriers can easily point to elevated non-energy readings, stubborn core inflation, and tariffs and supply chain issues keeping inflation elevated. The Bank of Canada has a 2% inflation target and the underlying readings are well above 2%.

Overall, the report puts the Bank of Canada in a tough spot. We argue that the Bank could probably justify an insurance cut as the economy slows. Their own April scenarios have inflation at 1.8-2% for the year and 2-2.7% next year and the last decision was a close call. However, sticky core inflation will make the Bank hesitant.

On balance, we continue to believe the Bank will cut three more times this year to 2% by year end, but the June decision is too close to call - while they could cut, they may easily do another ‘wait and see’ as they look for underlying inflation to cool.

Closer to home, Alberta’s inflation rate plummeted last month to 1.5%. This is a marked change from the recent pattern of Alberta hovering above the national inflation trend.

What happened? This is an energy story—excluding the energy component, the inflation rate matches the national rate at 2.9%. As with other provinces, the carbon tax removal shaved from gasoline and natural gas prices. But, unique to Alberta, the re-instatement of the provincial fuel tax is no longer in the base year.* Put another way, this is the first full month where the provincial fuel tax holiday is no longer influencing the inflation rate.

Shelter costs are not adding as much to inflation in Alberta (2.5% y/y last month), reflecting lower electricity prices and smaller gains in rents. Rent rose only 1.3% y/y (the smallest increase since May 2022), likely reflecting developments in the Calgary market (posted rents are now falling in Calgary).

*The province paused the fuel tax in 2023 and much of 2022. This lowered annual inflation in 2022-2023, but raised it when the tax was reinstated in 2024. The tax was partially reinstated in January 2024, and then fully reinstated in April 2024. As such, the tax measure will no longer affect the year-over-year readings starting with the CPI report for April.

Answer to the previous trivia question: British Columbia became a province in 1871.

Today’s trivia question: How many Stanley Cup championships have the Edmonton Oilers won?