Inflation ticked higher in March. Are Bank of Canada rate cuts still in the cards?

FILE – A person pumps gas in Mississauga, Ont., on Feb. 13, 2024. At the gas pumps, Canadians saw a 4.5 per cent year-over year price jump in March, compared with a 0.8 per cent increase in February.

Canada’s annual inflation rate rose slightly last month, accelerated largely by higher gas prices, data showed Tuesday.

Statistics Canada reported that the overall inflation rate in the country was 2.9 per cent year-over-year in March, up from 2.8 per cent the previous month.

Despite the rise in the headline figure, the broad-based easing in price pressures and improvement in all of Bank of Canada’s core inflation measures continue to point towards a potential interest rate cut coming this June, some economists say.

The annual pace of inflation has been hovering just below three per cent so far this year. It cooled to 2.8 per cent in February compared with 2.9 per cent in January, the agency had reported last month.

At the gas pumps, Canadians saw a 4.5 per cent year-over year price jump in March, compared with a 0.8 per cent increase in February.

This was due to higher global crude oil prices arising from supply concerns amid “geopolitical conflict and continued voluntary production cuts,” StatCan said.

Compared with February, gas prices rose by nearly five per cent month-over-month.

Shelter prices, which went up in March at the same annual rate of 6.5 per cent as February, also contributed to overall inflation ticking higher.

Higher rents (8.5 per cent) and mortgage interest cost index (25.4 per cent) pushed the shelter prices up.

The price of clothes and shoes, which saw the two largest declines in January and February since the start of the COVID-19 pandemic, rose in March by 1.8 per cent.

Meanwhile, there was continued relief at the grocery aisles, with the price of food purchased from stores increasing year-over-year by 1.9 per cent last month, down from 2.4 per cent in February and from 3.4 per cent in January.

“Acting as a small offset, food prices are clearly calming and are now much less of an inflationary force than a year ago,” wrote BMO’s chief economist Douglas Porter in a note Tuesday.

And while grocery inflation has been slowing, prices at restaurants appear more stubborn.

In March, prices for food purchased from restaurants rose 5.1 per cent from a year earlier, the same rate as in February and January.

This latest inflation report will be scrutinized by the Bank of Canada, which kept its key interest rate on hold last week at five per cent for the sixth straight decision, but which said it is “within the realm of possibilities” that it could cut interest rates in June.

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The central bank has said it has seen good progress on inflation but needs to see sustained evidence it is heading toward its two per cent target.

The Bank of Canada’s measures of core inflation were all down in March, StatCan reported.

BMO’s Porter said that the steady cooling in core inflation is “welcome news,” with the odds of a rate cut leaning to June for now.

“For the Bank of Canada, this result is likely just good enough to keep them on track for a potential trim in June,” Porter said.

RBC economist Claire Fan said in a note Tuesday that the central bank’s “preferred core measures that are designed to gauge broader underlying price growth all showed further improvement.”

The downward momentum in core inflation measures meets Bank of Canada’s requirement before it can start to cut interest rates, said CIBC senior economist Andrew Grantham.

“Today’s data meets that requirement,” Grantham said in a note Tuesday. He did add, however, there is one more inflation reading to come before the Bank’s next policy decision on June 5.

“We continue to expect a first cut at that June meeting,” he said.

The inflation report comes as the federal government prepares to release its budget later Tuesday afternoon.

— with files from The Canadian Press