Toronto/CMEDIA: Recent progress in Canada’s inflation rate reportedly could to be reversed, due to a spike in gas prices, triggered by the ongoing war in Iran, economists have warned.
This follows the release of Monday’s Statistics Canada annual inflation data unveiling Canada’s inflation rate slowed to 1.8 percent in Feb, dipping below the Bank of Canada’s two percent target as grocery prices eased,
There was an increase of 1.8 percent in the consumer price index year-over-year in Feb, down from 2.3 per cent in Jan.
“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.
Brent crude oil prices hovering above US$100 a barrel on Mon driven by supply risks in the Middle East and the closure of Strait of Hormuz caused surge in oil prices.
“Those are going to be reflected in upcoming numbers,” said Jean.
Despite the improving inflation data, 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 inflation could be affected through several channels beyond gasoline prices due to the conflict in the Middle East.
“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.”
Food and housing made Progress
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 was one of reasons for the improvement in Canada’s inflation numbers.
However, the numbers shown last February reflect some improvement that came from the easing of grocery prices, says Jean.
Jean 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
Faced by a number of conflicting forces, Bank of Canada would have to take a firm stance on its rate decision on Wednesday, says Jean and added the latest drop in job numbers, higher oil prices, negative housing developments, and the upcoming Canada-U.S.-Mexico Agreement (CUSMA) reviews would have to be accounted for.
“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.
