March CPI comes in surprisingly low at 2.3%
Canadian wallets experienced somewhat of a reprieve in March, as the pace of price growth came in cooler than expected, even as the winter tax holiday came to an end.
According to the latest data from Statistics Canada, the Consumer Price Index (CPI) in Canada came in at just 2.3% year over year, dipping below the 2.6% recorded in February. This undercut expectations that inflation would stay pat this month, or increase slightly, given several categories – such as some food, alcohol, and children’s items – were re-subjected to both GST and HST.
Lower gas and travel prices behind inflation drop
However, lower gas prices were largely responsible for the softer headline number, with drivers paying 1.6% less at the pump – due to the removal of the carbon tax – compared to a 5.1% increase in February. This was also due to lower crude oil prices, which have dropped in response to tariff threats and concerns that global oil demand will decrease.
Another notable contribution to slowing inflation was cheaper travel costs, which StatCan says coincided with decreased air travel from Canada to the United States. Travel tour prices fell 4.7% after rising 18.8% in February, marking a month-over-month decline of 8%. Air travel prices plunged 12% year over year in March, after already dropping 4.4% in February.
However, Canadians did find themselves paying more to put food on the table. Costs for both food purchased at grocery stores and in restaurants each rose 3.2% year over year, with the latter now nearly at the same level as it was in November, before the tax holiday took effect. According to StatCan, removing food costs from the overall CPI would reduce its annual growth rate to 2.1%, which is nearly in line with the Bank of Canada’s 2% target.
Mortgage interest costs continue to fall
Shelter costs also continue to be a major contributor to the cost of living, but have been steadily decreasing over the past year. The overall shelter index rose by 3.9% compared to the same month in 2024, though largely flat monthly, rising 0.2% from February.
Mortgage interest costs increased by 7.9% in March, down by 9% from February and 10.2% in January. While overall interest rates are still elevated, borrowers have experienced considerable relief as the Bank of Canada has steadily cut its benchmark interest rate since June 2024. Overall, the measure has fallen from its peak of 30% in 2023. Rent, meanwhile, rose by 5.1%.
Will lower inflation prompt a BoC rate cut?
While the central bank will be pleased to see the headline CPI come in lower than expected, it’s unclear how this latest inflation report will direct its future rate decision-making. The core measures that the BoC keeps a close eye on – called the median and trim – have remained largely elevated, at 2.9% and 2.8%, respectively. However, looking at the longer-term trend, they have now remained under 3% for three consecutive months, which could indicate prices are materially starting to slow. That, combined with a softer headline number, could prompt the BoC to cut its trend-setting interest rate again on April 16th – but a hold is also nearly as likely, both due to core remaining sticky and ongoing uncertainty from tariff threats.
“After a couple months of high-side surprises, Canadian inflation caught a serious March break, held down by much milder travel costs than normal. This speaks to the fact that the inflation impact of the trade war is more of a two-way street for Canada than the U.S., since Canada's tariffs are so much lighter so far, while the domestic economy is under more pressure,” writes Douglas Porter, Chief Economist and Managing Director of Economics at BMO, in a note following the CPI release.
He adds that a firmer Canadian dollar has also eased inflation concerns, and that gas prices are set to fall further next month as oil demand concerns remain.
“Normally, this would be a big green light for the BoC to cut tomorrow, except the small detail that their major core measures are holding close to 3% (so with the overnight rate having been slashed to 2.75%, real rates are already negative) and policymakers are operating in the dense fog of an ever-shifting trade war,” he says.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.