Canadian inflation readings are surging, a trend that’s just getting started. Statistics Canada’s (StatCan) Consumer Price Index (CPI) surged in March. The surge is largely attributed to energy prices, which had been dragging growth due to a base effect. A base effect that was set to expire in April, and set to compound with soaring energy prices.
Canadian Inflation Surges, Half of CPI Rising More Than 2% Y/Y
CPI’s annual growth reached 2.4% in March, up from 1.8% in February. The surge is attributed to energy prices, after the Iran War drove gas prices a record 21.2% higher. However, CPI excluding gasoline still came in at 2.2%, only accounting for a third of the 0.6 point acceleration.
Source: StatCan.
In reality, 4 of the 8 CPI basket components show annual price growth that exceeded 2% in March. Three of those components are now rising in excess of the Bank of Canada’s 3% upper band of tolerance: Food (4% y/y), Transportation (3.7%), and Health & Personal Care (3.3%).
On the upside, anyone who doesn’t need food, transportation, or health or personal care is perfectly fine.
Canadian CPI Set To Surge Further On Energy Price Base Effect
If inflation feels higher, that’s because it is. Last month we noted the energy base effect is set to end in April, sending CPI soaring. The agency acknowledged this factor briefly in this morning’s report and warned, “The removal of the consumer carbon levy will no longer impact the 12-month movement as of April 2026, and this will be reflected in next month’s CPI release.”
The brief warning downplays how big a shock is coming in the April report, landing next month. The removal of the consumer carbon tax means comparing untaxed prices to those with the tax. This base effect lowers CPI for a year, until the base effect ends. However, this morning’s report is the last subject to the modelling skew, adding ~0.7 points to CPI in April (May’s report).
Even without the latest war impacting energy prices, this was set to push CPI much higher. Now it’s set to arrive alongside any geopolitically-driven energy price surge.
So glad Carney eliminated the carbon tax to eliminate the pain his party inflicted on us, after he helped push to implement it.
Clearly he is just doing whatever he has to now. He was very clear in the UK, which resulted in a major recession there, that carbon taxes were the ‘only’ way this could work? Now he is so busy spending money we dont have, who cares about the environment.
Now Im OK with that, since it was never a model that worked, since Canada’s punitive sin taxes ceased having an impact on consumption long ago, but how does a person support someone who literally stands for nothing?
Serious question. How bad are things if CPI is a made up indicator designed to isolate consumer inflation from industrial inflation despite prices reflecting rising input costs? Did we really switch from monetary supply just to sandbag these numbers?
My question has always been what’s the point of CPI if it’s wrong and the Bank of Canada ignores it if it doesn’t like the number?
CPI is always going to be wrong. There is no way to accurately measure CPI, and once you do measure it, comparing it to another country, region or even city in the same country is impossible. Why? Well the methodology of CPI takes a basket of goods and services, uses that as a control price, and then measures the change y/y.
Now, lets say they picked a good basket of goods that actually measured cpi, not like Canada who cheats on interest, bank fees, cell phone and internet charges, insurance, and the list goes on. How do you come up with a price for goods in Canada? If you live in BC, prices of many goods are fundamentally different than in Toronto, Quebec, and even Manitoba? Then you have the issue of MSRP and actual sales prices, brand names vs generic, rtetail vs wholesale ….. So its a ‘guess’ at best.
The problem is since the 1990s, the only real control over the economy the BoC has is managing CPI. But if CPI is wrong, with a margin of error in Canada of probably 2-3% if not more, we have a disaster. This is why, despite all the time and energy wasted on this topic, we cant get CPI or the economy under control.
Its very simple if you understand that the root cause of CPI is monetary pressure from expansion or contraction of the M3 Broad money supply, and as Prof Krugman suggested in 2023, we could just manage inflation by managing the M3, not trying to manage the cpi.
The reason this makes sense is we have pretty good data on the growth of the M3 vs CPI. The M3 in Canada has more than doubled in 10y, while nominal GDP growth is less than 400B on a 2.1Tr GDP (19%). If you consider that Canada between 2015 and 2025 saw population growth of 22%, you see that the the lowest growth was in GDP, with the M3 expanding at more than 7.9% per year, population at 2% per year and GDP nominally at 1.7% per year.
So if the M3 is expanding at 4.5x the GDP, with population rising at 2% per year for a decade, the clear picture is this is exactly how we ended up in this mess. The problem is, despite 24/7 news, not a single group outside of bond and credit analysts is telling us exactly why? In effect, the last decade saw the middle class incur more than double the debt they had in 2014, they saw their real gdp per capita drop substantially, and while NW appeared to go up, it was almost all due to massive inflation pressure caused by banks funding ever higher prices for housing, despite guard rails like ‘stress’ tests and regulations. How did the price of an average home in the GTA, Vancouver area hit a place where it was eating up 80+% of pre tax income? This was the point of the stress test?
So much for making the numbers work for new Purpose Built Rental apartment projects.
Ian, the big issue with that policy was that there never was any sort of supply problem. First of all, everyone who has done high school economics should know that medical care, food, shelter are immune to the supply / demand pricing model, except tagentially on the margin. That means, maybe you will pay a little extra to live near transit or a mall, but the baseline price is set by forces well outside of supply and demand.
Add to that the major issue of credit manipulation of prices, greed and speculation, and frankly widespread fraud, and we end up here. The big problem is that Canada in 2024 was the exact same issue as the USA in 2009. Too much credit which diluted the value of housing, and eventually bled through into the general economy. You cant have housing go up 35% per year while the GDP went up 1%, that means you are just diluting the M3 money supply.
Frankly this entire debate has been completely dishonest. While realtors have little or no understanding of how pricing actually works, those who work for banks, govt and so on do.
So when I hear Mark Carney, reportedly a ‘genius’ in economics and credit, tell me that its a supply problem, that’s complete nonsense. Now his credentials in economics are actually very weak, with him only doing one thing of note in his entire career, that was being lucky enough to serve under the Harpert govt, but even he would know that Freidman clearly explained Modern Monetary Policy in 1963 when he said that inflation (or CPI) is always and everywhere a monetary phenomenon. As a central banke, it is incomprehensible he didnt understand this law. The actions of bankers causes inflation (both central and private) and no one else.
So throwing billions to ‘build’ rentals or ‘subsidize’ buyers with a GST rebate is 100% inflationary, and is basically a subsidy for developers, banks and construction companies? So therefore, this is at best a bait and switch.
Thank you for posting this so succinctly! I have been piecing together these ideas as I’ve been teaching myself macro economics over the past few years and this probably one of the best explanations I’ve seen.
Tell Punwasi good call on the energy price skew coming. I recall people on X saying it was BS, a month later Stats Can’t acknowledges it’s coming and she’s a big gurl.
The first concern is that its regulated industries that are leading inflation. Our federal govt created govt sponsored Cartels decades ago These cartels effectively are state sponsered oligopolies that charge ridiculous prices on their products, which is technically illegal in Canada, since its price fixing. Add to that the ‘sin’ taxes on various goods, generally also regulated heavily, and we get this mess.
Food, shelter, interest and bank charges, media and telecom, none of which SC measures properly, are leading the upward pressure on prices? Now, maybe if we didnt have 50+% of our markets ‘[protected’ from competition, Carney could make a deal for Free trade, but as has been the case since Trudeau 1.0, it is precisely these cartels that prevent free trade and cost us 2-5 times what we should be paying?
Even worse, the dim ON and Federal govt have now spent a great deal of money ‘helping’ to ‘reduce’ shelter prices, but they are still rising at more than 2% per year? One has to wonder if our tax dollars werent better spent growing our economy through tax cuts to productive industries and middle income Canadians, and not bailouts for banks, construction and developers? Really, do those people need a bailout?
Consider our ‘strong’ banks, who have roughly 50% the capital requirements of foreign banks, have been running record profits for more than 20y, I think maybe its time to stop protecting these guys (who have also turned Canada into a money laundering hub???) and help out the people who actually vote and pay taxes?
The big issue is not even this, its that Carney and Co. seem to think the Trudeau approach to Trump was a good one, and are doing everything they can to not be involved in any actual negotiations about NAFTA? So if Trump decides next week to cancel Nafta and make a unilateral deal with Mexico, setting 30% tarrifs on manufactured goods, steel and aluminum, then what? Canada’s has been mainly protected from tariffs, regardless of what the media says, because of NAFTA? Mexico has been working hard tm,o make a deal with Trump, despite being the main target of his attacks? So basically Carney is playing chicken with Trump?
Remember, none of this is to benefit you and me, its to benefit Billionaires and cartels who have been scamming us for 50+ys?
The only real question now is what does the BoC do? Clearly in April the prices will go well beyond the 2% mark again, and then they will have to do something. But if they increase rates 25-50bps, what effect will this have on inflation?
The problem is that for interest rates to have a material effect on cpi take 12-24mos. Given the massive expansion of the money supply, chasing after CPI will only cause even more gdp contraction, and likely send Canada into a credit nose dive.
The problem is with 10+y of failing in every conceivable way to manage the growth of debt in Canada at all levels (consumer, corporate and govt) we are in a terrible position. On top of that we have the same crew who used the ‘trade war’ with the USA to endanger what little remains of our economy in central Canada. Now higher energy, fertilizer and resource prices will help the prairies, but since the L:iberals effectively destroyed any investment in those sectors in 2016, that wont fix the mess they are now making.
If Carney and co dont stop playing this game of hide and seek with Trump, they could effectively destroy the economy of central Canada, which is ironic since it is central Canada who has consistently voted for them? Now thats some irony for you eh?
Since this is the last month in which what Chrystia Freeland correctly called a costly political gimmick, the GST/HST rebate will raise its ugly head in the CPI monthly updates, perhaps it is worthwhile to look at its impact on one of the most important components it affected, food purchased from restaurants. There was a 4.7% increase in this component in March 2025, in large part due to the GST/HST rebate being removed starting on February 16. The 2.3% inflation rate in restaurant food from March 2018 to February 2026 augmented the exit effect to -4.8%, which exceeded the 4.6 percentage-point decline in the restaurant food annual inflation rate from 7.8% in February to 3.2% in March. The drop in the annual rate was limited by a 0.2% monthly increase in restaurant food prices in March.
The high annual food price inflation rate of 4.0% for March 2026 looks even worse if you think that the Carney government got a big one-time assist in reducing the inflation rate for restaurant meals and for some items for food purchased in stores from this exit effect, something they won’t get next month or any month thereafter.
One thing that has not attracted much comment is the number of months there has been no change in the replacement cost component for three of the four Atlantic provinces. This has been the case for Newfoundland since June 2025, for Prince Edward Island since August 2025 and for New Brunswick since February 2025. For greater clarity, this would mean, to take Newfoundland as the example, this would mean that its replacement cost component has been showing the same value as for May 2025 from May 2025 forward. In this case, this does not look like some nefarious plot to hide out-of-control inflation. The series is imputed, with a one-month lag, from the dwelling component of the new housing price index. While conceptually correct, it does create problems when the small number of builders who report in each province are hit by declining demand. There may be no prices for them to report. In this case a pooled sample for the region as a whole may well have shown a price decrease.