Bank of Canada Governor Tiff Macklem speaks at a press conference held in Ottawa on Wednesday, June 4, 2025. (Credit: THE CANADIAN PRESS/Adrian Wyld)
The Bank of Canada is preparing to dig into new inflation data this week as the country continues to grapple with rising prices, global trade tensions, and recent tax changes. Statistics Canada is set to release May’s Consumer Price Index (CPI) on Tuesday, and policymakers are watching closely.
The inflation outlook has become harder to interpret in recent months. While economists expect May’s inflation to have risen slightly to 1.8% year-over-year, others like Benjamin Reitzes from BMO forecast it may have dipped to 1.5%, driven by lower shelter costs and only modest gas price increases.
In April, inflation had dropped to 1.7%, largely because of cheaper gasoline following the end of the consumer carbon tax. But experts say the monthly numbers are just part of the picture.
More Than Just One Number
The Bank of Canada doesn’t rely solely on headline inflation to guide its decisions. Instead, it studies multiple indicators to detect underlying trends. Governor Tiff Macklem described the current inflation picture as “complicated” during a recent speech in Newfoundland and Labrador. One factor adding to that complexity is the economic fallout from ongoing trade tensions with the United States.
Macklem warned that the recent firmness in inflation may be an early signal of the impact of tariffs. Though these added costs are expected to push prices higher, it's still unclear how quickly businesses will pass them on to consumers. If households and companies cut back on spending, inflationary pressure may remain soft — at least in the short term.
Impact of Trade and Taxes
Katherine Judge from CIBC believes inflation likely rose slightly in May due to higher food prices influenced by counter-tariffs. She also expects a slowdown in rent inflation, which saw an unusual jump in April.
The judge noted that Statistics Canada recently made updates to how it calculates the CPI. While these changes are expected to have little effect on the headline number, they could shift how some items are weighted in the basket of goods measured.
Another factor skewing inflation data is the tax policy changes made earlier this year. A two-month federal GST holiday lowered the cost of many consumer goods, and the elimination of the carbon tax also temporarily reduced gasoline prices. However, the impact of these tax changes will phase out within a year, giving a clearer picture over time.
A Closer Look at Core Inflation
To get a better grip on where inflation is headed, the Bank of Canada is increasingly focusing on inflation metrics that strip out tax influences. In April, inflation excluding taxes stood at 2.3%, higher than expected.
Meanwhile, the Bank’s core inflation measures — which exclude volatile components like food and energy — have risen above 3%. But Macklem warned these figures might be distorted by one-off factors. Other alternative core measures suggest inflation could be lower.
“There’s some unusual volatility,” Macklem noted. “How long it lasts is still unclear.”
What’s Next?
The Bank of Canada will have two more inflation reports in hand before making its next interest rate decision on July 30. If the numbers show inflation is staying under control, policymakers may have room to cut interest rates in response to the slowing economy and trade challenges.
As Reitzes put it, “If inflation cooperates, the Bank might lower rates to support the economy. But right now, it’s not giving them that chance.”
