Surging gas prices threaten to reverse Canada’s inflation progress, economists say

Jimmy Jean, chief economist and strategist at Desjardins, joins BNN Bloomberg to discuss February's CPI data.

Economists warn that the spike in gas prices, triggered by the ongoing war in Iran, threatens to reverse recent progress in Canada’s inflation rate.

This comes after the release of annual inflation data by Statistics Canada on Monday, which shows Canada’s inflation rate slowed to 1.8 per cent in February, dipping below the Bank of Canada’s two per cent target as grocery prices eased.

The consumer price index rose 1.8 per cent year-over-year in February, down from 2.3 per cent in January.

“It’s a little bit bittersweet in the sense that you do see that improvement in inflation and underlying inflation in particular, but at the same time, you know what’s coming ahead,” said Jimmy Jean, chief economist and strategist at Desjardins.

Oil prices have surged, with Brent crude oil prices hovering above US$100 a barrel on Monday, driven by supply risks in the Middle East, as the Strait of Hormuz remains closed.

“Those are going to be reflected in upcoming numbers,” said Jean.

Despite the improving inflation data, the outlook could change quickly as higher energy prices ripple through the economy, says Randall Bartlett, deputy chief economist at Desjardins.

“This is really a snapshot of where the Canadian economy would be without this external shock to the outlook,” said Bartlett.

He said the conflict in the Middle East could affect inflation through several channels beyond gasoline prices.

“You have to layer on the Iran conflict, in the oil price shock that we’ve seen, the rise in gasoline prices, transportation costs, supply chain disruptions,” Bartlett said.

“And so that’s really thrown a lot of uncertainty into the outlook for the economy, for inflation and for monetary policy.”

Jean added that higher energy costs could eventually hit food prices and global shipping costs.

“If we recall in the Ukraine episode, we saw a big run-up in food prices, and part of that was due to gas prices globally shooting higher,” he said.

“You’re seeing all those insurance contracts going higher, so shipping is going to be more expensive, and that could be transmitted through end consumer prices.”

Progress made on food and housing

Part of the improvement in Canada’s inflation numbers was caused from a two month temporary GST break introduced by the federal government in late 2024, which lowered tax on certain gifts and dining until mid-February.

However, the numbers last February show some improvement came from the easing of grocery prices, says Jean.

He added housing-related inflation is also beginning to cool, falling below four per cent for the first time since 2022, back to pre-pandemic levels.

“That’s the impact of policies, especially as it relates to immigration and to alleviate those pressures. And it shows that those policies have been working,” said Jean.

Bank of Canada faces conflicting signals

It’s going to be tricky for the Bank of Canada to take a firm stance on its rate decision on Wednesday, says Jean.

He says with the latest drop in job numbers, higher oil prices, negative housing developments, and the upcoming Canada-U.S.-Mexico Agreement (CUSMA) review, the Bank of Canada is facing a number of conflicting forces.

“If we were to see more numbers like we saw on Friday, quickly you would start to see the R-word (recession) being pronounced more often,” said Jean.

Bartlett says with new risks emerging, he expects the central bank to proceed cautiously.

“We think the bank is going to stay on the sidelines and really sort of take a balanced approach in its outlook for monetary policy,” he said.