The Bank of Canada (BoC) published a staff working paper last Friday examining how import tariffs affect overall prices in Canada. The research suggests the price impact is real but smaller than a simple pass-through calculation would predict. The study looked at Canada’s retaliatory tariffs that were imposed on the US in 2025, which were subsequently removed when Prime Minister Mark Carney came into office. Last month, Canada imposed new retaliatory tariffs on the US after they had put their own fresh tariffs on Canada.

Using Canada's retaliatory tariffs on US imports as a case study, the paper estimates a 25% counter-tariff raises Canada's aggregate price index by 0.66%. That is well below the 1.25% increase expected if tariffs passed fully through to consumers.
The biggest cushion was consumer substitution. As US goods get more expensive, buyers shift toward domestic or non-US alternatives, which reduces the price impact by 0.47 percentage points.
Investors have generally welcomed the news as a reduction in trade-policy uncertainty, one of the biggest overhangs on global economic growth and earnings this year.
Businesses absorb some of the costs.  Companies also trim their profit margins rather than pass along every dollar of the tariff, which lowers the price effect by a further 0.26 percentage points.
Higher tariffs mean a bigger gap. The difference between simple pass-through estimates and actual price effects grow as tariffs rise. At a 50% tariff, direct pass-through alone would predict more than twice the true price impact.

The findings suggest that ignoring substitution and margin adjustments would overstate the consumer price impact of retaliatory tariffs by about half. The burden is still real for households and the overall economy, but this research may help explain why tariff-related price increases have been more modest than initially feared. It is important to note that staff working papers reflect the views of the authors, not necessarily those of the BoC.

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