Source: Bank of Canada
Tariffs influence inflation
Tariffs that slow growth and lead to job cuts push inflation down. But tariffs also add to costs, which typically lead to higher prices for consumers. Right now, it’s hard to see the direct impact of tariffs because temporary factors are making inflation bounce around. For example, the removal of the consumer carbon tax knocked 0.6 percentage points off inflation in April, pushing inflation below the 2% target. This temporary tax effect will lower year-over-year inflation for the next 11 months, but then it will disappear.
If we look beyond temporary factors and volatility, inflation appears to be a bit stronger than the Bank expected. Canadian businesses also report higher costs tied to finding new suppliers and markets, which could affect inflation if these costs are passed on to consumers in the form of higher prices. At the same time, more job losses would lead to lower inflation.
The trade situation continues to evolve and there is still a lot of uncertainty. The Bank is assessing how the effects of tariffs are spreading through the economy, while focusing on keeping inflation near the 2% target.