‘It’s an energy price shock’: Canada’s inflation rate to get worse, economists say

Pedro Antunes, chief economist at Signal 49 Research, joins BNN Bloomberg to discuss the latest Canadian CPI data.

Canada’s inflation rate accelerated in March due to a record surge in fuel costs, and economists warn that it is likely to get worse.

The war in Iran sent gas prices soaring in March, and Canada’s annual inflation rate rose to 2.4 per cent from 1.8 per cent in February, according to Statistics Canada. The agency said March saw the highest monthly jump in gasoline prices on record, and without it, inflation would have been 2.2 per cent.

But gas prices are likely only going to go up higher from here, even though the inflation jump was lower than expected, says Pedro Antunes, chief economist at Signal 49 Research.

“I think we’re in for a run of inflation, not just in March, but in April as well,” he says.

“We know that in April, gasoline prices are kind of averaging around 30 per cent above where they were in February.”

Oil prices hit their highest level since 2022, peaking near US$120 per barrel in March. On Monday, American crude was trading over $85 per barrel.

The continuous high oil costs tend to ripple through the economy, explains Antunes.

“It’s hitting gasoline prices first, it will also translate into higher transportation costs, and that’s when it starts spreading more broadly through the economy,” says Antunes.

March could be described as a transition period before the full impact of rising energy prices is felt, says Andrew Hencic, senior economist at TD Bank Group.

Hencic says measures of core inflation, which strip out food and energy, were “relatively soft” in March.

“That again kind of goes back to our prior thinking that the economy and the excess slack in the economy was putting a little bit of downward pressure on prices before we really experienced this energy shock and the impacts that could come in the following months.,” he says.

Bank of Canada likely to wait

Central banks adjusting interest rates now could be premature, given the uncertainty around how long the energy shock will last, says Hencic.

“The central banks can’t do much in terms of the way of gasoline prices,” he says.

Antunes says the inflation surge is being driven by external factors beyond the central bank’s control.

“What can they do?” Antunes says. “They can increase rates to hit the economy even harder. But the point here is that this is coming from outside. It’s an energy price shock.”

Hencic says there is a scenario where the oil shock fades and the economy is adjusting to a new level of interest rates.

“We think it’s probably appropriate for them to look through this first phase for the Bank of Canada. That means staying pat for the time being,” says Hencic.

Even so, markets are already reacting, explains Antunes.

Borrowing costs tied to bond yields have begun to rise in anticipation of tighter monetary policy.

“So we’re already feeling the pinch of this inflation impact on essentially, financing costs, debt financing costs,” says Antunes.

Food prices remain a concern

Canadian food inflation slowed to four per cent in March, down from 5.4 per cent in February.

This cooling was primarily caused by the end of a previous year’s tax holiday falling out of annual comparisons, leading to lower price increases for groceries and restaurant meals compared to the previous month, says Statistics Canada.

“That has not eased at all yet,” says Antunes. “I think we may end up with more pressure.”

He says the disruption of natural gas shipping in the Strait of Hormuz is also having a severe impact on the global fertilizer market, which heavily uses natural gas.

“We’re already hearing from grain producers and farmers, and even in Canada here, we’re a big producer of fertilizer, but it is a product that is international. So when the prices go up globally, they go up domestically,” says Antunes.

“There’s just no moving away from it, and it’s really hurtful to lower income households in particular.”

Limited relief from tax cuts

The suspension of the federal fuel excise tax, which kicked off Monday, may offer some help at the pump, but the impact is limited, says Antunes.

He says the tax cut could offset roughly 10 cents per litre of recent increases, but that is small compared with the broader rise in global oil prices.