Canada Inflation Jumps to 2.4% as War Drives Up Gas Prices

Shoppers in downtown Ottawa. Photographer: James Park/Bloomberg Photo by James Park /Photographer: James Park/Bloombe

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(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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On a monthly basis, the consumer price index rose 0.9%, compared with the median expectation of 1.1% in a Bloomberg survey of economists. Headline inflation was projected to quicken to 2.6% last month, up from 1.8% in February.

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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. Excluding gasoline, the index decelerated to 2.2% from 2.4% in February.

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Meanwhile, natural gas prices fell by 18.1% on a monthly basis, moderating the run-up in energy prices. StatCan noted natural gas prices are dependent on North American supply and are “therefore more insulated from global price changes.”

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The two-year benchmark Canada yield, which had traded just below 2.8% earlier in the morning, fell to around 2.75% as of 8:49 a.m. in Ottawa. The loonie reversed modest gains, trading at C$1.3695 per US dollar.

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Monday’s inflation data provides the first glimpse into the Iran war’s impact on price growth in the country. The Bank of Canada has signaled that it plans to look through the short-term impact of the oil shock.

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The central bank will have its eye on whether the effect broadens out beyond gasoline prices, as it weighs inflationary risks against ongoing weakness in the economy. 

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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%.

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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%. 

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The share of CPI components rising by more than 3% and 5% are both lower in March, pointed out Charles St-Arnaud, chief economist at Servus Credit Union. 

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“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.

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In an effort to address the impact of the Iran 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.

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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.