Canada’s Inflation Rate Slows: Canada’s annual inflation rate unexpectedly decelerated to 2.3% in March 2025, marking a significant drop from February’s 2.6% reading and coming in below the consensus forecast.
This slowdown brings inflation closer to the Bank of Canada’s 2% target and occurs amid ongoing trade tensions with the United States and uncertainty over the central bank’s upcoming interest rate decision. The decline in inflation was largely driven by lower gasoline prices, reduced travel costs, and promotional pricing in the telecommunications sector, despite the end of federal tax holidays that had previously restrained consumer prices.
Canada’s Inflation Rate Slows
Inflation Trends and Core Measures
Canada’s annual inflation rate fell to 2.3% in March, decreasing from February’s eight-month high of 2.6%, and below market expectations that it would remain steady at 2.6%3. On a monthly basis, the Consumer Price Index (CPI) rose by just 0.3%, significantly lower than February’s 1.1% increase12. This moderation is particularly noteworthy as it occurred despite March being the first full month without the federal tax holiday on eligible goods, which ended on February 153.
The Bank of Canada’s preferred core inflation measures also showed improvement. The core CPI, which excludes volatile food and energy prices, rose 2.2% year-over-year in March, a meaningful reduction from the 2.7% increase recorded in February2. Similarly, the average of the BoC’s two preferred core inflation rates (CPI-Trim and CPI-Median) decelerated slightly to 2.85%, versus 2.9% in February1. The three-month moving average of these figures slowed more dramatically to 2.74%, from 3.32% previously, suggesting a sustained trend toward normalization1.
When applying seasonal adjustments, the National Bank of Canada noted that prices actually dropped by 0.4% in March – the steepest monthly decline since April 2020, despite the end of the GST holiday4. This suggests that underlying disinflationary forces are at work in the Canadian economy.
Regional Variations
The inflation moderation was broadly observed across Canada, with prices rising at a slower pace in March compared to February in eight of ten provinces1. Nova Scotia was the only province that experienced accelerating price growth, primarily driven by higher shelter costs. Meanwhile, Alberta stood out with completely unchanged prices over the period1.
Factors Driving the Inflation Slowdown
Several key factors contributed to the unexpected decline in Canada’s inflation rate for March. Most notably, consumers paid 1.6% less at the pump than they did a year earlier, representing a significant reversal from February’s 5.1% increase in gasoline prices13. This decline occurred amid an aggressive drop in crude oil prices following OPEC+’s confirmation of plans to raise output, contributing to a broader slowdown in transportation inflation to 1.2% (down from 3% in February)3.
Travel-related expenses also declined substantially, with prices for travel tours falling 4.7% and airfares plunging by 12%1. Analysts attribute part of this decline to softened travel demand to the United States from Canada, potentially reflecting changing consumer behavior amid escalating trade tensions between the two countries1.
The telecommunications sector provided another source of price relief, as promotional activities by carriers drove cellular service costs down by 8.8%, compared to a more modest 3.7% decrease in February3. This significant reduction highlights the impact of competitive pricing strategies in certain sectors of the Canadian economy.
Kyle Chapman, FX markets analyst at Ballinger Group, observed with irony that “the Bank of Canada has Trump to thank for the relatively painless disinflation last month,” noting that “the two biggest contributors to the downside surprise — gasoline and airfares — are the result of tariff-related concerns about global growth and Canadian travellers boycotting travel to the US”1.
Upward Price Pressures
Despite the overall moderation in inflation, certain categories continued to experience price increases. March was the first full month without the federal tax holiday, which ended on February 15, resulting in upward price pressures for previously tax-exempt goods and services13. This impact was particularly evident in the food sector, where overall prices jumped 3.2% year-over-year, up from 1.3% in February3.
The restaurant industry saw one of the most dramatic shifts, with prices for food purchased from restaurants rising 3.2% from a year ago, a striking contrast to the 1.4% decline recorded in February1. This reversal demonstrates how the expiration of temporary tax measures can significantly impact specific sectors of the economy.
When excluding the volatile gasoline component, the broader Consumer Price Index rose 2.5% in March, representing only a slight decrease from February’s 2.6% increase1. This suggests that while headline inflation has moderated, underlying price pressures remain somewhat persistent throughout the Canadian economy.
Market Reactions and Economic Implications
Financial markets responded swiftly to the lower-than-expected inflation figures. The Canadian dollar dropped to the day’s low against the U.S. dollar immediately following the release, trading at 71.99 cents U.S. as of 9:05 a.m. in Ottawa1. Simultaneously, Canadian bonds extended gains and outperformed most global peers, with the two-year bond yield falling approximately four basis points to 2.547%1.
Perhaps most significantly, traders in overnight swaps boosted bets on an imminent rate cut to about 45% after the release of the data, up from just over 30% previously1. This shift reflects growing market confidence that the Bank of Canada now has increased flexibility to continue its easing cycle.
The inflation data comes at a crucial time for the Canadian economy, which has been experiencing tepid growth, job losses, and weak consumer spending in recent months1. The unexpected moderation in prices provides a potential bright spot, suggesting that inflationary pressures may be normalizing faster than anticipated despite the recent end of tax holidays and ongoing trade tensions.
Bank of Canada Monetary Policy Outlook
The latest inflation figures arrive just one day before the Bank of Canada’s scheduled monetary policy announcement on April 16, 2025, placing policymakers at a pivotal decision point12. Prior to the release of the March inflation data, a slight majority of economists expected the central bank to hold rates steady at 2.75%, pausing its easing campaign for the first time since beginning to reduce borrowing costs in June 20241.
The Bank of Canada has already implemented seven consecutive interest rate cuts, bringing the benchmark rate to its lowest level since 20222. With all key inflation measures now coming in below estimates, policymakers retain the option to cut interest rates for an eighth straight time to further support the economy amid ongoing challenges1.
Opinions among economists remain divided. Andrew DiCapua, economist at the Canadian Chamber of Commerce, argued for caution, stating: “If trade tensions continue to escalate, we’re looking at the risk of a stagflationary environment with slower growth and rising prices. With so much uncertainty around growth — especially with tariffs introduced by the U.S. — we expect the bank to hold rates steady at tomorrow’s meeting”1.
In contrast, Katherine Judge, economist at Canadian Imperial Bank of Commerce, suggested that “the easing in price pressures is consistent with a 25 basis-point cut on Wednesday,” emphasizing that “the downside risks to growth from the trade war outweigh any upside to inflation from tariffs”1. The National Bank of Canada similarly predicted that the Bank of Canada could lower rates further, potentially aiming for 2.0% by year-end4.
Trade War Implications
The backdrop to Canada’s inflation picture is the escalating trade tension with the United States. U.S. President Donald Trump has imposed tariffs on Canadian goods including steel, aluminum, and vehicles, prompting Canada to broadly match the auto tariffs and add import taxes to approximately $60 billion in U.S. products1.
While Trump excluded Canada from his now-delayed reciprocal tariffs earlier in April 2025, the existing levies and overall trade uncertainty have created what the Bank of Canada described as “a major source of uncertainty” for the Canadian economy1. This uncertainty complicates monetary policy decisions, as policymakers must balance the potential inflationary impact of tariffs against their dampening effect on economic growth.
Paradoxically, concerns about slowing global oil demand and economic growth due to the trade war have helped lower crude prices, contributing to the decrease in gasoline prices that helped moderate overall inflation in March1. However, economists warn that this beneficial effect on inflation could be short-lived.
“Prices are grounded for now, but that might not last. In the months ahead, we could start to see the impact of new tariffs pushing prices higher,” cautioned Andrew DiCapua1. This suggests that while the trade tensions may have temporarily contributed to lower inflation through reduced oil prices, they could eventually push inflation higher through increased costs for imported goods.
Conclusion
The unexpected moderation in Canada’s inflation rate to 2.3% in March 2025 provides a positive signal amid economic uncertainty, bringing price growth closer to the Bank of Canada’s 2% target. This deceleration, driven by lower gasoline prices, reduced travel costs, and telecommunications promotions, occurred despite the upward pressure from the expiration of federal tax holidays.
For the Bank of Canada, this inflation report creates additional flexibility ahead of its April 16 interest rate decision. While some economists advocate for caution given the uncertain trade environment, others see room for another rate cut to support growth in a challenging economic landscape.
Looking forward, the inflation outlook remains closely tied to the evolution of trade tensions with the United States and their complex effects on the Canadian economy. While tariffs may eventually push prices higher, their initial impact through lower oil prices and reduced travel has actually helped moderate inflation in the short term. If these tensions escalate further, Canada could face the challenging prospect of stagflation – a combination of slower growth and rising prices that would test the Bank of Canada’s policy framework.
As Trading Economics projects, Canada’s inflation rate is expected to rise to 2.9% by the end of the second quarter of 2025, before moderating to 2.3% in 20273. This suggests that while the immediate inflation picture has improved, challenges likely remain on the horizon for Canadian policymakers, businesses, and consumers.
