It’s not a slam dunk, but today’s inflation report creates more space for the Bank of Canada to consider an interest rate cut tomorrow.

The Consumer Price Index (CPI) rose by 2.3% year-over-year (y/y) in March. This was an improvement over the 2.6% rate seen in February, and well below the 2.6% expected by us and economists polled by Reuters.

The inflation cooldown came despite the full effects of the GST/HST holiday being reversed—that meant upward pressure on the prices of previously GST/HST exempt items such as food and children’s clothing and toys.

Lower prices for gasoline and travel tours pushed CPI in the other direction.

There’s lots of noise these days in the inflation data, the latest being the GST holiday. The noise won’t end in April, with the elimination of the retail carbon tax (and now a dip in oil prices) lowering inflation, while counter-tariffs have the opposite effect.

The sticking point for the Bank of Canada could be sticky core inflation, which attempts to capture the inflation trend. The core measures closely tracked by the Bank of Canada—trim and median—remained hotter than the headline at 2.8-2.9% y/y.

But speaking of trends, one promising development is that shelter costs (a major inflation culprit in recent years) continued to put less pressure on headline inflation. Shelter prices rose 3.9% y/y last month, the smallest increase since April 2021. Mortgage interest costs have finally started to level off and will continue to add less to annual inflation in a lower interest rate environment.

Runway for the Band of Canada to cut?

The timing of this report is unusual, coming only one day before the Bank of Canada makes its rate decision. The Bank never makes a decision on one report alone, but this inflation print slightly increases the odds of a cut in our view.

We have long said tomorrow’s decision is a close call, but our thought is ‘why not now?’ The market is pricing in cuts later this year. The Bank of Canada could elect to wait for more information and see how the trade war plays out in the economic data. Or they could get in front of the coming slowdown with an ‘insurance cut’ tomorrow. Their own business outlook survey shows that businesses are delaying capital spending and hiring. Further, with a lighter touch on U.S. tariffs applied to Canada (versus other countries), there could be less inflation coming from counter-tariffs than feared under previous scenarios, such as a broadly-applied 25% U.S. tariff and 10% on energy.

What may keep the Bank on hold? Sticky core inflation readings and foggy conditions. A hold will signal that they want more clarity around the impacts of the trade war and will be watching the data closely before moving. Our point, however, is what clarity will we receive before the June meeting? Uncertainty has been a central feature of this trade war. A hold would also signal their discomfort over the elevated core readings and their seriousness in maintaining price stability.

Alberta inflation holds steady above national rate

Inflation in Alberta continued to run warmer than the national pace at 2.8% y/y in March, unchanged from February.

Shelter costs rose 4.4% y/y versus 3.9% nationally y/y, with larger gains in owned accommodation costs. A tighter housing market, in part driven by continued interprovincial in-migration, is playing a role here. Gasoline prices increased slightly over last year, compared to a small decline nationally. This partly reflects the full re-instatement of the provincial fuel tax. Looking ahead, we expect gasoline inflation readings to move more in line with national trends, as temporary effects of the fuel tax pause come off in April.*

*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 next month’s CPI report for April.

Answer to the previous trivia question: Based on the number of passengers, the Hartsfield-Jackson Atlanta International Airport is the busiest airport in North America.

Today’s trivia question: What is the busiest seaport in North America?