(Bloomberg) — Canada’s inflation rate surged to 2.4% in March as the Iran war triggered a record increase in gasoline prices, though it came in slightly lower than economists expected.
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Headline inflation was projected to quicken to 2.6% last month, up from 1.8% in February. Excluding gasoline, the consumer price index was up 2.2% from a year earlier.
Monday’s inflation data provides the first glimpse into the impact on prices in Canada of the conflict in the Middle East. The Bank of Canada has signaled that it plans to look through the short-term impact of the oil shock. Traders have priced in a high chance of a rate hike later in the year.
Bonds rallied at the short end of the curve. The two-year benchmark Canada yield, which had traded just below 2.8% earlier in the morning, fell to around 2.76% as of 10:44 a.m. in Ottawa.
Gasoline prices jumped by 21.2% on the month, according to Statistics Canada’s report on Monday, marking the largest increase on record as the Middle East conflict drove up oil prices globally.
Meanwhile, natural gas prices fell by 18.1% on a monthly basis, moderating the run-up in energy costs. StatCan noted that natural gas is dependent on North American supply and “more insulated from global price changes.”
Overall, the consumer price index rose 0.9% on a monthly basis, compared with a median expectation of 1.1% in a Bloomberg survey of economists.
The central bank will have its eye on whether inflationary effects broaden out beyond gasoline prices, as it weighs those risks against ongoing weakness in the economy.
The bank’s preferred core measures suggest underlying price pressures remained contained in March, with the median gauge holding steady at 2.3% and trim easing slightly to 2.2%. Excluding food and energy, inflation slowed to 1.9% from 2%.
“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 reignite broader inflation pressures,” Royal Bank of Canada economist Abbey Xu said in a note.
The central bank is slated to make an interest rate announcement next week and is widely expected to hold its policy rate at 2.25%.
The share of CPI components rising by more than 3% and 5% are both lower in March, said Charles St-Arnaud, chief economist at Servus Credit Union.
“The Bank of Canada will be pleased to see that there is no sign that higher energy prices are spilling over to other prices. However, this is something it will monitor closely, as the longer energy prices remain elevated, the more likely the higher costs will be pass to consumers,” he said in an email.
In an effort to address the impact of the war on the cost of living, Prime Minister Mark Carney announced last week a temporary pause on the federal fuel excise tax on gasoline, diesel and jet fuel. The pause came into effect Monday and extends to Sept. 7.
Looking forward, a further rise in gasoline prices will see headline inflation jump to around 3% in April, before hopefully easing back slightly the following month, partly due to the fuel tax suspension, Andrew Grantham, senior economist at Canadian Imperial Bank of Commerce, said in a report to investors.
“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,” he said.
Another major source of affordability concerns is grocery prices, which rose 4.4% in March on an annual basis following a 4.1% increase in February.
Prices for fresh vegetables rose by 7.8%, the largest increase since August 2023.
“The longer the conflict in Iran and the closure of the Strait of Hormuz continue, the more it will test Canadians’ patience and that risks pushing already elevated inflation expectations higher,” Andrew DiCapua, principal economist at the Canadian Chamber of Commerce, said in an email.
—With assistance from Mario Baker Ramirez and Derek Decloet.
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