Canada’s economy is slowing along with the global economy. While inflation is receding, there are pockets of higher prices for essential goods that remain difficult for low-income households contending with diminished wage growth—even as inflation receded back to the Bank of Canada’s two per cent inflation target over the past 12 months.
That is why we think Canadian growth will arrive at a 1.2 per cent pace this year and continue along that same trend in 2026 as the renegotiation of the free-trade agreement with the U.S. and Mexico lies in wait.
The subdued economic activity and the drop in inflation despite ongoing tariffs—the effective tariff rate between the U.S. and Canada stands at 3%—imply that for now, the Bank of Canada has room to provide more accommodation in the level of financial conditions. The markets anticipate one more cut in the bank’s overnight policy rate.
Price stability
The Bank of Canada’s core-inflation measures are increasing at rates of three per cent for consumer price index (CPI)-trim mean and 3.1 per cent for CPI-median, both at the top of their acceptable range.
While the headline inflation rate averaged 1.9 per cent over the past 12 months and prices of goods are increasing at rate of only 0.7 per cent per year, prices of services are increasing at a 2.8 per cent yearly rate.
Consumer perceptions of inflation
Consumers are likely to judge the Bank of Canada’s success in fighting inflation by the sticky prices of services and essential goods. Those perceptions are likely to guide household spending decisions.
For instance, while gasoline is 33 per cent cheaper than it was at its 2022 peak, it is still 23 per cent higher than at the end of 2019.
Moreover, food prices remain elevated—whether in total and increasing at a 3.4 per cent yearly rate or at a fast-food restaurant and increasing at a 5.9 per cent yearly rate.
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