It’s new data, but old news. Canadians have been feeling the impacts of higher gasoline prices for over six weeks. It’s only today that we see the effects in the (lagged) inflation data.

Canada’s annual inflation rate rose to 2.4% in March, a significant jump from the 1.8% recorded in February. The primary driver was a massive spike in prices at the pump—up 21% over February.

The price shock was felt nationwide, with inflation rates rising in every province. In Alberta, inflation rose to 2.3%, up from 1.8% the month prior.

Could be worse

Only 2.4% nationally? If that number seems too low to be true, there are a couple of explanations.

First, prior to the war in Iran, inflationary pressures were easing. We came into the conflict with an annual inflation reading of 1.8% in February, aided by less pressure on shelter costs and decline in energy prices.

Second, there are some temporary tax factors. Most notably, the federal government removed the carbon tax on April 1, 2025, reducing gas prices in most provinces and territories by up to 18 cents per litre. That’s helping soften the year-over-year hit on the energy CPI since the carbon tax is still in the base period. However, this effect will reverse itself next month, and we’ll see a bigger energy price spike in April.

Also on the tax front, and this is getting technical, there is a distortion in the inflation data caused by the GST/HST holiday. The tax holiday ran from December 14, 2024, to February 15, 2025. During that time, the tax was removed from a huge basket of goods, including restaurant food and children’s clothing. In March 2025, prices for these items jumped back up when the tax was reinstated. Because annual inflation (March 2026) is calculated by comparing current prices to those from March 2025, the holiday is no longer adding upward pressure to annual inflation rates.

Due to these gyrations, the Bank of Canada looks at core inflation metrics that filter out these types of temporary shifts to get a sense of underlying inflation. The good news is that, for now, these readings have been behaving, with the median and trim core measures holding at around 2.3% year over year last month. Looking at monthly changes shows progress in recent months*.

*For core inflation, our favourite timely metric is the annualized % change in the 3-month moving average. For trim CPI, that came in at 1.3% and for median CPI it was 2%. 

New tax measures - cushioning, but not reversing, the impact

The federal government’s fuel tax relief kicks in today (April 20), and lasts through Labour Day. The savings of up to 10 cents per litre will provide a partial offset to the increase we’ve seen since late February.

Relief could also come from a provincial tax holiday in Alberta, depending on whether prices stay high. More specifically, the Government of Alberta fuel tax relief program will kick in on July 1, if WTI oil prices average US$80 or higher in the 20 trading days leading up to June 16.

Bank of Canada - In ‘wait and see’ mode

Prior to the war, the Bank of Canada was not cracking open the champagne, but they were liking what they were seeing on inflation. Obviously, that doesn’t matter as much anymore. But it is better to go into an energy shock when inflation is already cooperating. The Bank of Canada has some breathing room to take a wait and see approach, and see through a temporary increase in inflation.

So what’s keeping Governor Macklem and the Bank of Canada team up at night? It’s whether this energy shock is temporary or durable. They will see through a temporary price shock, but they will need to lean against price increases that are sustained, especially if the impacts spread beyond energy to the broader inflation basket. Food prices, for example, will see some upward pressure due to the spike in fertilizer costs.

As for now, expect the Bank of Canada to announce a rate hold on April 29. We are currently forecasting the Bank of Canada to remain on hold throughout 2026, then raise its policy rate by 0.5 percentage points by the end of 2027.

Our view is predicated on oil prices staying elevated for the next 2-3 months then easing (with WTI averaging around $US 85/bbl in 2026), while a sluggish Canadian economy will keep domestic inflation pressures at bay.

Answer to the previous trivia question: The first Air Jordan sneaker was produced in 1984 for Michael Jordan to wear and released to the public on April 1, 1985.

Today’s trivia question: When was leaded gasoline banned in Canada?