Economists warn of a spike in inflation following a dip in February

Annie Bergeron-Oliver examines Canada's inflation numbers from February and why some experts are warning that there could be a spike due to the war in Iran.

Canada’s annual inflation rate slowed in February to 1.8 per cent, but many economists believe the new Statistics Canada data may be the dip before a spike driven by oil prices and the war in Iran.

Since the war began, oil prices have jumped 40 to 50 per cent. A hike that wasn’t captured in StatCan’s February Consumer Price Index (CPI) numbers, given the war didn’t start until the end of February.

Vancouver School of Economics Professor Paul Beaudry expects to see Canada post higher inflation numbers in March.

“Once the gas prices go up, that goes directly into inflation. There’s no way around it,” said Beaudry.

For small businesses that are already experiencing rising prices, especially when it comes to food, the idea of higher inflation and higher gas prices is troubling. Dan Kelly, the president and CEO of the Canadian Federation of Independent Business, says almost every business uses fuel in one way or another.

“This is unwelcome pressure on top of huge amounts of uncertainty that are wafting through the economy,” he said. “Businesses haven’t even recovered from the (COVID-19) pandemic, then we move into a trade war and now we move into rising gas prices. The knots continue and for some businesses, this is a big, big threat.”

What will Bank of Canada do Wednesday?

The Bank of Canada is tasked with keeping inflation around two per cent. One of the main ways the bank stays on target is by raising or lowering the interest rate, which currently sits at 2.25 per cent.

Beaudry, a former Bank of Canada deputy governor, says central bankers will be paying close attention to the war’s impacts on Canada’s economy when it makes its next rate decision on Wednesday.

For now, Beaudry does not expect the bank to move away from its current rate of 2.25 per cent. Instead, he expects central bankers will say they are watching the war closely and monitoring whether inflation hits more sectors than just oil.

“I don’t expect an increase at this point, or not in the foreseeable future, unless we really see a more expanding war,” he said.

In its latest forecast, RBC raised headline inflation for March to 2.4 per cent in Canada, due to an assumption of higher oil prices. RBC also believes the Bank of Canada will look through near-term volatility in energy prices and hold rates steady.

“Risk of persistently elevated oil prices as the conflict continues, or due to the destruction of oil facilities, may require different responses down the road,” the forecast warned.

Pedro Antunes, chief economist at Signal49 Research, also believes the bank will hold steady.

“I think the Bank of Canada is, without any hesitation here, stand until they know more about how this will play on inflation,” said Antunes.