Inflation jumps on Iran war shock but few signs yet of spreading price hikes

Royal Bank of Canada Senior Economist Claire Fan says inflation is showing 'optimistic signs of slowing' outside of rising energy prices.

Statistics Canada reported a jump in the headline inflation rate for March but economists parsing the latest data argue there are few signs so far that the price shock from the Iran war is spreading beyond the pumps.

The agency reported Monday that the annual rate of inflation accelerated to 2.4 per cent last month, an increase of 0.6 percentage points from February.

It said higher gas prices tied to the war in the Middle East were the main reason for the jump. But economists had expected a slightly larger increase in the headline inflation rate and pointed to signs of easing elsewhere in the consumer basket.

“I would say, apart from those fuel-related inflation spikes, the report was fairly benign,” said TD Bank senior economist Leslie Preston.

Iran’s move to close the Strait of Hormuz in response to U.S. and Israeli attacks and ongoing uncertainty over ceasefire talks has sent global fuel prices skyrocketing in recent weeks.

• Canada’s inflation rate to get worse, economists say

StatCan said March’s 21.2 per cent monthly increase in the price of gasoline was the largest on record. The agency said inflation would have been 2.2 per cent in March if gasoline was taken out of the equation — a second consecutive monthly decline.

Monday also marks the start of Ottawa’s roughly four-month break on federal fuel excise taxes, a move expected to remove as much as 10 cents from a litre of gas and four cents per litre of diesel. Economists expect that move will take one-to-two tenths of a percentage point off the headline inflation rate starting in May.

BMO chief economist Doug Porter said in a note to clients Monday that he expects the headline inflation rate will top three per cent in April as gas prices kept rising heading into the month and the carbon tax removal drops out of the year comparison.

“However, 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,” Porter said, though he put emphasis on “possible.”

Preston said the Bank of Canada’s closely watched core inflation metrics, which tend to strip out volatile movements from categories like gas, showed further signs of easing in March.

That suggests that knock-on effects from the war in Iran have yet to spread.

“We’re not yet seeing those price pressures show up in other categories. That would be something we’d be watching for in a couple of months,” she said.

Food inflation, meanwhile, cooled to four per cent from 5.4 per cent in February as the lingering distortions of the federal government’s two-month “tax holiday” a year earlier fell out of the annual comparisons. That drove down inflation at restaurants and on some grocery items last month.

Fresh vegetable prices jumped 7.8 per cent year-over-year in March, which StatCan chalked up to recent tough growing conditions for cucumbers, peppers and celery.

Preston warned that food inflation is one area particularly vulnerable to higher fuel prices because profit margins in the grocery sector are thin and transportation costs make up a sizeable share of expenses.

“In Canada, we are getting a lot of our food from very far away, so transportation costs are a key factor. That would be something we’d be watching for in the months ahead potentially to boost food prices,” she said.

The Bank of Canada will be paying close attention to the March inflation figures as it prepares for its next interest rate decision on April 29.

The central bank has signalled it will look through the initial inflationary spike tied to the Middle East conflict but will act to ensure higher gas prices don’t turn into longer-term inflation.

The Bank of Canada has held its benchmark interest rate steady at 2.25 per cent since its last cut in October. Financial market odds are more than 90 per cent in favour of another hold next week, according to LSEG Data & Analytics.

Porter noted that the drags on inflation in March were varied, as telephone services, auto insurance, furniture, candy, and mortgage interest costs all saw outright price declines on a monthly basis, suggesting underlying softness in the economy.

“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 BoC rate cuts, not hikes. This report reinforces that opinion,” he said.

Preston said she is with the majority calling for a hold from the central bank next week but agreed with Porter that rate cut chatter would be louder if not for the conflict.

Separately on Monday, the Bank of Canada released its quarterly surveys of business and consumer expectations. While the central bank was out polling in mid-February — before the war in Iran erupted — followup surveys suggested firms were already grappling with higher costs from the conflict.

The Bank of Canada’s trackers showed sentiment was improving somewhat heading into the war, but later surveys suggested businesses’ inflation expectations were higher in the year ahead and marginally higher over the medium term. Consumers also expect higher prices for gas and food over the coming year, particularly if the war lasts a long time.

Preston said the Bank of Canada will be particularly concerned with keeping inflation expectations reined in.

“If businesses, who are in a position to set prices, expect inflation to be higher, it becomes a self-fulfilling prophecy. Businesses will raise prices to cover their expected increases in costs,” she said.

Some of the businesses polled in the followup surveys mentioned that their ability to pass on prices was constrained by weak demand and the cost structure of their contracts.

With a little over a week to go until the central bank’s next rate decision, Preston said monetary policy-makers’ tone will depend heavily on whether gas prices continue along their recent easing path.

Further drops in prices at the pumps could give the Bank of Canada confidence that the energy supply shock is temporary, while a renewed global price hike would lean toward discussion about when costs could get passed on to consumers.

“The bank is likely still working out what they’re going to say, because a week is a long time in the current environment,” Preston said.

This report by The Canadian Press was first published April 20, 2026.

Craig Lord, The Canadian Press