Inflation Retreat in Canada: Where to Invest as Rates Slide

The Canadian inflation dragon is finally showing some cracks. With the annual rate dipping to 1.7% in April—its lowest in seven months—the Bank of Canada is poised to cut rates further, setting the stage for a prime investing opportunity. But here's the catch: headline inflation's decline is masking a stubborn core. Investors must navigate this nuance to find the sectors that will thrive in a lower-rate environment. Let's break it down.

The Inflation Split: Energy Down, Core Costs Up
The April inflation report paints a divided picture. Energy prices plunged 12.7% year-over-year, dragged down by the removal of the federal carbon tax and OPEC+ supply boosts. Gasoline prices tanked 18.1%, while natural gas fell 14.1%. But don't cheer too loudly—the trimmed-mean core inflation, which excludes volatile items, jumped to 3.1%—its highest in two years.

This core inflation surge is fueled by groceries (+3.8%), travel (+6.7%), and services like restaurants (+3.6%). Fresh beef (up 16.2%) and coffee (13.4%) are leading the charge in food, while Quebec's slower gasoline declines (due to its cap-and-trade system) and Nova Scotia's HST tax cut show regional quirks.

The Bank of Canada's Playbook: Rate Cuts Ahead
The Bank of Canada has made its stance clear: two more rate cuts by December 2025, dropping the policy rate to 2.25%. With a 55% chance of recession and tepid growth (1% for 2025), they'll err on the side of stimulus. This is a huge tailwind for equities—but not all sectors will shine.

Investing in the Inflation Split: 3 Plays

1. Consumer Discretionary: Travel & Dining
   The travel sector is a no-brainer. With core inflation at 3.1%, demand for travel tours (up 6.7%) isn't slowing—people are willing to pay more for vacations. Airlines and cruise operators could benefit from lower borrowing costs, while hotels and travel agencies stand to gain from pent-up demand.

Stock to Watch: Air Canada (AC.TO). Its shares have lagged despite strong post-pandemic demand—lower rates could reignite investor interest.

1. Food & Beverage: Companies with Pricing Power
   Grocery prices are rising, but not all food companies are created equal. Look for firms with strong brands and the ability to pass costs to consumers. Think of George Weston (WN.TO), which owns Loblaw, or Maple Leaf Foods (MFI.TO), a dominant player in meat. These companies can weather inflation better than discount grocers.

Beware: Avoid commodity-exposed firms. Lower energy prices are squeezing fertilizer producers and farmers—stick to processors and retailers.

1. Defensive Sectors: Healthcare & Utilities
   A potential recession means investors will flock to stable sectors. Healthcare (e.g., Sanofi's Canadian operations, or biotech firms like ProMetic) and regulated utilities (e.g., Fortis (FTS.TO)) offer steady cash flows. Utilities, in particular, benefit from lower rates and inflation-indexed dividends.

The Risks: Don't Let Rate Cuts Lull You
While rate cuts are bullish, don't ignore the 55% recession probability. Sectors like real estate (which relies on borrowing costs) and energy (still volatile) could stumble. Also, trade tensions with the U.S. remain a wildcard—even with CUSMA compliance easing tariffs, uncertainty lingers.

Final Call: Focus on Pricing Power and Stability
The Bank of Canada's rate cuts will boost equities, but pick your spots. Consumer discretionary (travel) and food firms with pricing power are my top bets. Defensive plays like utilities are insurance against a slowdown. Avoid energy and housing unless you're a risk taker.

As always, stay nimble—this inflation split isn't over yet.

Investing is about timing. Right now, Canada's rate cuts are the clock. Set your watch.