Robert Besser
23 May 2025

OTTAWA, Canada: Canada's inflation picture became more complicated in April, with headline inflation easing but core measures ticking higher—posing a challenge for the Bank of Canada ahead of its next policy decision.

Statistics Canada reported this week that annual inflation slowed to 1.7 percent in May, down from 2.3 percent in March, primarily due to falling energy prices and the removal of a federal carbon tax. The reading was slightly above analyst expectations of 1.6 percent and the Bank of Canada's forecast of 1.5 percent.

But underlying inflation told a different story. The CPI median, which strips out extreme price movements, rose to 3.2 percent, while the CPI trim measure increased to 3.1 percent—both at 13-month highs. The central bank closely monitors these core metrics as they offer a clearer view of inflation trends unaffected by volatile categories like fuel.

"Signs of renewed weakening in the economy on the one hand... but stronger core inflation on the other makes for a tough decision for the Bank of Canada," said Andrew Grantham, senior economist at CIBC Capital Markets.

Markets responded quickly: the odds of a rate cut at the bank's June 4 meeting fell from 65 percent to 40 percent, according to swaps market data.

Energy prices were the main drag on the headline rate, with gasoline down 18.1 percent and natural gas prices dropping 14.1 percent compared to a year ago. But grocery prices climbed 3.8 percent, up from 3.2 percent in March, and travel tour prices rose 6.7 percent year-on-year.

On a month-to-month basis, overall inflation dipped by 0.1 percent, defying forecasts for a 0.2 percent decline.

Despite mounting pressure from volatile global trade conditions, analysts like TD Securities' Andrew Kelvin say the central bank may remain cautious. "The data doesn't scream for a rate cut," Kelvin said, "but trade-related uncertainty could tilt the balance."

The Canadian dollar firmed slightly to C$1.3930 against the U.S. dollar following the report.

With just one key data point—Q1 GDP due May 30—remaining before the Bank of Canada's following announcement, the central bank faces a tricky path as it weighs conflicting signals from the economy.