OTTAWA – Economists anticipate that Canada's annual inflation rate surpassed three percent for the first time since 2023 in April, influenced heavily by the ongoing energy crisis resulting from the Iran war. Statistics Canada is scheduled to release the latest inflation data on Tuesday, with a Reuters poll indicating a significant increase in the headline inflation rate to 3.1 percent in April, up from 2.4 percent in March. This anticipated surge is attributed largely to rising gasoline prices, which have seen an additional eight percent hike in April following a staggering 21 percent increase in March.
The escalation in global energy prices, which began in late February after Iran closed the Strait of Hormuz in reaction to U.S. and Israeli attacks, has severely affected oil flows from the Gulf region. Although there have been attempts to resolve the conflict, prices have remained high. A contributing factor to the expected rise in inflation is the impending expiration of the federal carbon price in April 2025. The recent federal decision to remove approximately 18 cents from the price of regular gasoline has worked to stabilize the inflation rate over the previous year, but with this relief falling out of the annual price comparison, inflation numbers are predicted to climb.
The inflation rate has remained within the Bank of Canada's target range of one to three percent for the past two years, last breaching the three percent mark in December 2023. The central bank has indicated that it will monitor the inflationary impact of higher gas prices stemming from the Iran crisis but will act if necessary to prevent entrenched inflationary pressures. RBC economists Abbey Xu and Annie Zheng cautioned that while they do not foresee the energy price spike reigniting widespread inflation, it largely depends on the severity and duration of the oil price shock. They emphasized the need to watch how these energy price pressures affect broader inflation metrics.
In light of the ongoing high gasoline prices, some economists have begun to revise their inflation forecasts for 2026 and beyond. Desjardins recently adjusted its outlook, predicting that inflation will peak at 3.1 percent in the second quarter of 2026. This forecast reflects expectations that the headline inflation rate will be 0.9 percentage points higher in 2026 and 0.2 percentage points higher in 2027 compared to previous estimates from February. The adjusted forecast assumes that the benchmark West Texas Intermediate (WTI) price for oil will stabilize around US$100 through May before declining to US$75 by the end of the following year. As a result, gas prices are projected to average about 30 cents per liter higher in 2026 and 2027 than pre-war predictions.
LJ Valencia, an economist at Desjardins, noted that the federal government’s decision to waive federal fuel excise taxes for roughly four months starting mid-April is expected to alleviate some pressure at the pumps, potentially mitigating inflation figures in the short term. However, this tax relief may not be sufficient to counteract the substantial increases in energy and gasoline prices being observed. Beyond fuel costs, Desjardins anticipates that food inflation could be approximately 0.6 percentage points higher this year due to increased transportation and fertilizer costs impacting grocery prices.
Other consumer goods, especially those imported from overseas like clothing, may also face upward price pressures due to rising freight costs as a result of the Middle Eastern conflict. Valencia pointed out the various "moving parts" affecting the inflation forecast, highlighting the uncertainty regarding the trajectory of oil prices amid geopolitical instability. Furthermore, looming factors potentially impacting the economy and inflation include the upcoming review of the Canada-U.S.-Mexico trade agreement, as existing U.S. tariffs are already influencing the Canadian economy. The possibility of stricter trade measures following the review could trigger further economic adjustments, presenting additional challenges for inflation even with soaring energy prices.
The Bank of Canada has maintained its policy interest rate at 2.25 percent, with a focus on being responsive to economic and inflationary pressures. Valencia speculated that the central bank would likely remain on the sidelines for the rest of 2026 as it waits to analyze how inflation and economic risks unfold. Economic shifts and inflation dynamics remain closely tied to the global energy situation and domestic fiscal policies moving forward.
