Headline CPI inflation jumped up to 2.4% year-on-year (y/y) in March, slightly less than consensus expectations. Higher energy prices were a big part of the story, with inflation ex-energy up a more modest 2.2% y/y.
Prices at the pump soared 21% in March – the largest increase on record. Energy prices as a whole were 3.9% higher versus a year ago, an about face from being down 9.3% y/y in February. But energy prices a year ago still included the consumer carbon levy, which was removed in April 2025. So the impact of energy on inflation is set to get much larger in next month’s data.
Inflation for other key consumer essentials picked up. Grocery inflation picked up again to 4.4% y/y in March, up from 4.1% in February. Shelter inflation also picked up slightly, rising 1.7% y/y, up from 1.5% y/y in February. Despite this, overall services inflation cooled further to 2.5% y/y.
The Bank of Canada has focused on broader “underlying inflation” recently, but the official core inflation metrics (median and trim), cooled slightly in March to 2.3% y/y. Zeroing in on trends over the past three months, trim and median inflation continued to run well below the Bank of Canada’s 2% target.
Key Implications
As expected, higher oil prices boosted Canadian inflation in March. Oil prices have fallen in recent days but remain nearly 40% higher than a year ago. That means energy prices are likely to keep headline inflation elevated for some time. April’s inflation reading is likely to head much higher as the dampening effect of the removal of the consumer carbon levy falls out of the year-on-year inflation calculation.
Given a generally soft economic backdrop in Canada, we expect the effect on core prices should be more modest. Core inflation is expected to stay reasonably close to the 2% target on a year-on-year basis this year. The Bank of Canada is widely expected to leave its key policy rate unchanged at 2.25% at next week’s announcement. We will be listening closely for the Bank’s assessment of the impact of the spike in oil prices on Canada’s economy.
