Key Takeaways
- Canada’s annual inflation jumped to 2.4% in March from 1.8% in February, according to Statistics Canada.
- A sharp rise in gasoline prices was the biggest contributor to the acceleration.
- The Iran war-driven oil price rise could continue to push inflation higher, analysts say.
Canada’s inflation rose sharply in March, driven by a spike in gasoline prices as the Iran war disrupted global oil flows. However, core inflation, which excludes the most volatile price categories, was softer than expected. That underlying mildness effectively allows the Bank of Canada to continue holding interest rates steady for the remainder of the year, analysts say.
Canada’s Consumer Price Index accelerated to 2.4% in March from 1.8% in February, just below the 2.5% FactSet estimate, according to the latest Statistics Canada report. The inflation gauge was up 0.9% month over month in March, following a 0.5% increase the previous month, slightly slower than the 1.0% FactSet estimate.
The acceleration was primarily led by gasoline prices, which rose 3.9% year over year in March after dropping 9.3% in February, due to a supply shock resulting from the war in the Middle East. Another notable driver was the 7.8% year-over-year increase in vegetable prices, the largest since August 2023 (8.7%).
However, the Bank of Canada’s preferred core measures of inflation, CPI-trim and CPI-median, were contained after five consecutive months of easing. These measures exclude items with the most price volatility, such as rent, groceries, and gasoline. March CPI-trim edged to 2.2% from 2.3% in February, while CPI-median held steady at 2.3%. Core CPI, which only excludes food and energy, fell to 1.9% month over month from 2.0%.
Central bank policymakers are due to meet on April 29. They are broadly expected to keep the policy rate unchanged at 2.25% as they monitor the impact of higher energy prices. The Bank has held rates steady at its past three meetings.
Following the report, the Canadian dollar was little changed at C$1.36, or 0.73 US cents, while the Morningstar Canada Index edged lower by 0.15 percentage points to 6,108.39. Two-year government bond yields remained at 2.76%.
March CPI Report Key Stats
- CPI rose 0.9% month over month, up from 0.5% in February.
- On an annualized basis, CPI rose 2.4%, up from 1.8% in February.
- CPI-trim cooled to 2.2% from 2.3% in February, while CPI-median was unchanged at 2.3%.
The following are excerpts from analyst notes on the March CPI report.
Without the Iran War, the Bank Might Cut Rates
“It could have been worse. Much as other major economies posted a significant pop in headline inflation, the record rise in gasoline prices lifted Canada’s inflation rate significantly last month. However, the picture for underlying inflation was a bit better than expected, and continues the recent pattern of steadily moderating core inflation trends. Our considered view is that if it were not for the conflict with Iran, the discussion would currently be revolving around the strong possibility of Bank of Canada rate cuts, not hikes. This report reinforces that opinion.”
—Douglas Porter, chief economist at BMO Economics
The Bank of Canada to Remain on Hold Through Year-End
“Of course, higher gasoline prices were the primary driver of the acceleration in inflation, with only limited signs of pass-through to other areas yet. Indeed, if anything, core inflation was tamer than expected in March.
“Looking forward, a further rise in gasoline prices will see headline inflation jump to around 3% next month, before hopefully easing back slightly in May, partly due to the temporary suspension of the federal fuel excise tax (worth about -0.2 percentage points to headline inflation for May). Pass-through from higher energy prices into core measures of inflation may become more evident closer to the summer months, particularly as higher air fares are picked up more fully, but slack within the Canadian economy should prevent those measures from reaccelerating too much, enabling the Bank of Canada to remain on the sidelines through 2026.”
—Andrew Grantham, senior economist at CIBC Economics
Core Price Pressures Contained for Now
“The broadly target-consistent gain in an average of the Bank of Canada’s preferred CPI-trim and CPI-median core measures in March will persuade policymakers to look through the jump in the all-items CPI at next week’s meeting. However, the risk of inflation expectations becoming unanchored is growing as the war nears the two-month mark.
“Looking past these two typically volatile categories [gasoline and food prices], the Bank will be content with moves in the core price indices. Indeed, the all-items CPI excluding food and energy was unchanged last month. The Bank will continue to strike a cautious tone when announcing next week’s rate decision.”
—Bradley Saunders, North America economist at Capital Economics
Markets Lowering Bets on the Bank of Canada Rate Hike
“As we expected, the global increase in energy prices appears to have had only a limited impact on underlying inflation metrics. Even if the conflict in the Middle East continues, we view this as a relative price shock that will have only minor spillovers to core inflation metrics.
“As a result, the Bank of Canada should be able to remain on the sidelines for the rest of this year in an effort to spur a revival of economic activity. In response to the data, market participants have further reduced bets on Bank of Canada rate hikes, with less than one 25 basis point increase now priced for this year.”
—Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
No Rate Hike This Year Unless Core Inflation Reignites
“Given that the economy is operating with excess supply, significant pass-through of higher oil prices to core CPI is unlikely. Still, the risk of persistently higher inflation will rise the longer the conflict and supply disruption drag on.
“The Bank of Canada should be pleased to see softer core inflation in March. We believe the Bank of Canada will hold the overnight interest rate at its currently slightly stimulative 2.25% level for the rest of 2026. For the Bank of Canada to hike rates this year, it would likely need to see persistently higher core inflation and evidence of an upward shift in long-term inflation expectations.”
—Michael Davenport, senior economist at Oxford Economics
The Bank May Focus on Weaker Economic Outlook
“While some components, particularly grocery prices and rent, are still running well above (~4%) year-ago levels, the March report reinforces our view that recent increases in oil prices can push headline inflation higher in the near term but are unlikely to re-ignite broader inflation pressures. The Bank of Canada will keep a close eye on inflation expectations, but slower core price growth measures leave the central bank flexibility to also keep an eye on what is still a soft economic backdrop, with the unemployment rate still elevated.”
—Abbey Xu, economist at Royal Bank of Canada
Core Inflation to Remain Close to the Bank’s 2% Target
“Energy prices are likely to keep headline inflation elevated for some time. April’s inflation reading is likely to head much higher as the dampening effect of the removal of the consumer carbon levy falls out of the year-on-year inflation calculation.
“Given a generally soft economic backdrop in Canada, we expect the effect on core prices should be more modest. Core inflation is expected to stay reasonably close to the 2% target on a year-on-year basis this year. The Bank of Canada is widely expected to leave its key policy rate unchanged at 2.25% at next week’s announcement. We will be listening closely for the Bank’s assessment of the impact of the spike in oil prices on Canada’s economy.”
—Leslie Preston, managing director and senior economist at TD Bank
