By Robb M. Stewart
OTTAWA--Inflation surged in Canada last month thanks to a record jump in gasoline prices, though cost pressures from the conflict in the Middle East so far appear contained and may ensure the central bank continues to leave interest rates steady.
The consumer-price index rose 0.9% in March, the biggest monthly increase in a little over a year, data from the national data agency showed Monday. That drove the index up 2.4% year-over-year, after inflation cooled for a second month running in February to 1.8%.
The rapid acceleration was mainly due to increased energy costs following the spike in crude oil prices, which propelled annual inflation to its hottest in three months, though that was cooler than the 2.6% pace economists anticipated.
More importantly from the Bank of Canada's perspective, there was little sign of a spillover from the Iran war into underlying inflation. Bank of Canada officials remain wary of a broadening fallout from the war and disruptions to shipping through the Strait of Hormuz, but have indicated they will look through the immediate impact of higher oil prices.
Prices at the pump jumped 21.2% in March, the largest monthly rise on record, Statistics Canada said. That meant drivers were paying 5.9% more for gas than a year earlier, a more muted increase due to comparisons with the final month of the federal government's consumer carbon levy before it was scrapped last year.
However, core prices excluding volatile food and energy costs rose 1.9% on a year earlier, slightly slower than the 2% increase seen in February. And the trimmed mean and weighted median measures of underlying inflation preferred by the Bank of Canada were unchanged, averaging 2.3% annually.
Annual inflation has hovered near the Bank of Canada's 2% target for two years. The breadth of inflationary pressures, while still elevated, eased in March as the share of consumer-price index components rising by more than 5% declined and the share of components increasing by more than 3% was steady.
"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," Royce Mendes, head of macroeconomic strategy at Desjardins, said.
The inflation report offers central bankers a first look at the early impact on Canada's economy from the Iran war ahead of the next week's policy decision
Gasoline prices rose further in April, which economists expect will spur inflation even higher and possibly above 3% this month, before the government's temporary suspension of a federal fuel excise tax kicks in this week. And weakness in the economy is expected to limit company's ability to pass on their higher energy costs to consumers.
"Core measures of inflation could well reaccelerate slightly over the summer months as signs of pass-through in areas such as air fares become more obvious, but continued slack within the economy should keep domestically-driven services inflation tame and we continue to see the Bank of Canada holding interest rates at their current level throughout 2026," Andrew Grantham, senior economist at CIBC Capital Markets, said.
Overall, energy prices jumped 13.1% in March and 3.9% compared with a year earlier, moderated somewhat by a steep fall in prices for natural gas, with largely comes from North American supply so is more insulated from shifts in global prices.
Consumers paid more for food bought at stores for the month, including the largest increase in fresh vegetables since August 2023, but the pace at which food prices at restaurants increased cooled compared with a year earlier, which was a month after a temporary tax break on some purchases came to an end.
Slower growth in prices for alcoholic drinks, as well as toys, games, and hobby supplies also contributed to some downward pressure on inflation in March.
The central bank has left its policy interest rate steady at each of its last three meetings. On Friday, Bank of Canada Gov. Tiff Macklem said policymakers didn't want to lift interest rates prematurely given economic growth in Canada is already weak, though that had to be balanced against acting too late and allowing inflation to become entrenched.
The focus for the central bank is expected to be on the risk that businesses and households aren't confident inflation will come back to 2% in the medium term, and less about higher near-term inflation expectations that will be sensitive to energy prices.
"Nothing hangs in the balance on this one report which is a placeholder to be informed by the path forward," said Derek Holt, head of capital markets economics at Bank of Nova Scotia.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
04-20-26 1141ET
