A motorist fills up his car as a gas station in Ottawa on Monday. Gas prices surged 21.2 per cent in March from February.Keito Newman/The Globe and Mail
Canada’s inflation rate jumped in March as consumers faced the largest monthly gas-price increase on record because of the Middle Eastern conflict, which has throttled deliveries of crude oil and other commodities through the critical Strait of Hormuz.
The annual inflation rate hit 2.4 per cent last month, accelerating from 1.8 per cent in February, Statistics Canada reported Monday in its Consumer Price Index report. Despite the quickening of inflation, the figures came in weaker than analyst expectations of 2.6 per cent.
Prices at the pump surged by 21.2 per cent in March from February, the largest monthly increase recorded by Statscan. Excluding gas, the CPI rose by an annual 2.2 per cent in March, compared with 2.4 per cent in February.
“It could have been worse,” said Bank of Montreal chief economist Doug Porter in a note to clients. He added that “the picture for underlying inflation was a bit better than expected, and continues the recent pattern of steadily moderating core inflation trends.”
Monday’s report did little to sway predictions for the next interest-rate setting by the Bank of Canada, which is widely expected to hold rates at 2.25 per cent at its April 29 meeting. Interest-rate swaps, which capture market expectations of monetary policy, were pricing in one quarter-point hike by the end of the year as of Monday, according to Bloomberg data, similar to odds on Friday.
Revised BoC survey of firms found higher expected input prices after Iran war
The Bank of Canada held rates steady in March, in the early days of the world’s oil-price shock. Governor Tiff Macklem has said the central bank is prepared to raise interest rates if the shock feeds into a broader set of prices and pushes up inflation expectations. But he has generally played down the risk of this happening in the near term, with slack in the Canadian economy acting as a counterweight to inflationary pressures from energy prices.
Energy costs are largely the only factor pushing up inflation, CIBC Capital Markets senior economist Andrew Grantham said in a note to clients.
“For now we expect few signs of increased inflationary pressures outside of the direct impact on energy costs,” he said. Food inflation is expected to ease although higher air-travel costs will likely affect inflation rates in the summer, he added.
Food costs rose 4.4 per cent year-over-year in March, up slightly from February’s rate increase. The price of fresh vegetables saw the largest increase since August, 2023, rising 7.8 per cent from a year earlier.
Economists expect April’s inflation rate to rise again, to around 3 per cent.
Prices at a gas station in Ottawa on Monday. Prices at the pump surged by 21.2 per cent in March from February, the largest monthly increase recorded by Statscan.Keito Newman/The Globe and Mail
Gas prices are again expected to be a key factor, according to TD senior economist Leslie Preston. Despite having fallen as a result of the U.S.-Iran ceasefire agreement earlier this month, oil prices are still nearly 40 per cent higher than they were a year ago, she said.
Mr. Porter said the April CPI report “already has two strikes against it.” Gasoline prices remain high, despite the gas tax break announced last week by Prime Minister Mark Carney. Further, the removal of the consumer carbon levy last spring – which had created a drag on inflation numbers – will no longer be part of the year-over-year calculation.
“Depending on where oil prices go and how long the Strait remains closed, it’s possible that April will mark the high-water point for inflation this year (with heavy, heavy emphasis on ‘possible’),” Mr. Porter wrote.
Mr. Grantham of CIBC expects inflation to climb over the summer before easing toward the end of the year.
The central bank’s quarterly business and consumer surveys published Monday showed that near-term inflation expectations have risen in response to the Middle East conflict. However, longer-term inflation expectations – the key concern for the central bank – remain relatively subdued.
The business survey took place before the outbreak of the war. Follow-up calls by the central bank found that businesses in “upstream” segments of the value chain – agriculture, oil and gas, manufacturing and transportation – have already experienced cost increases. Some companies further down supply chains expect input costs to rise in the coming months.
At the same time, businesses reported constraints on their ability to pass rising input costs along to customers. A weak demand environment, constrained consumer budgets and elevated competition all make it difficult to raise prices.
With a report from Mark Rendell