Why a 25% Counter-Tariff Adds Only 0.66% to Canada's Price Index

A new Bank of Canada paper estimates how Canada's own tariffs feed into Canadian prices, and the headline number is smaller than a simple pass-through story would suggest. Using Canadian firm-level market shares and an oligopolistic model, the paper finds that a 25% counter-tariff on U.S. imports raises Canada's aggregate price index by 0.66% — far below what direct cost pass-through would predict.

The gap comes from two adjustments: consumers substitute away from the taxed goods, and firms change their markups. The tariff is real, but the price index absorbs less of it than the sticker on the border would imply.