Economists Warn Iran War Could Spike Canadian Inflation to 3% or Higher
Economists are sounding the alarm that Canada's recent decline in inflation could be short-lived, with the potential for a sharp reversal to three per cent or more in the coming months if the conflict in Iran persists. This warning comes as rising gas prices from the war threaten to undermine economic stability.
Inflation Data Shows Cooling Trend
According to Statistics Canada, inflation in February measured 1.8 per cent year over year, based on consumer price index (CPI) data released on Monday. This figure was slightly below expectations of 1.9 per cent and marked a decrease from January's 2.3 per cent. Core inflation measures, which exclude volatile food and energy prices, also showed moderation, with CPI-median and CPI-trim both decelerating to 2.3 per cent year over year from 2.5 per cent and 2.4 per cent, respectively.
On a three-month annualized basis, median, trim, and CPI excluding food and energy slowed to 1.4 per cent, as noted by economists. Shelter inflation pulled back to 1.9 per cent year over year, while gasoline prices saw a slight increase but remained down 14 per cent from a year ago.
Economists' Perspectives on the Outlook
Katherine Judge, an economist at CIBC Capital Markets, described the current inflation picture as "tame overall," providing some comfort to the Bank of Canada. However, she warned that the aftermath of the war could see headline inflation accelerate to roughly three per cent year over year in the near future. "While the before picture looked good, the after picture of inflation following the start of the war could show headline inflation accelerating," Judge stated in a note.
David Rosenberg, president of Rosenberg Research & Associates Inc., characterized Canadian inflation prior to the war's effects as a "non-event," attributing this to a contracting employment market that dampens demand-side price pressures. Canada lost 84,000 jobs in February, with the unemployment rate rising to 6.7 per cent from 6.5 per cent in January, according to Statistics Canada.
Rosenberg highlighted that February inflation undershot expectations across multiple measures. The unadjusted CPI was 0.5 per cent month over month, below the consensus of 0.7 per cent, while core inflation year-over-year slowed to two per cent, missing expectations of 2.1 per cent. Headline CPI at 1.8 per cent reached a seven-month low and also fell below estimates.
Implications for the Labor Market and Economy
Core CPI excluding food and energy is now aligned with the Bank of Canada's inflation target of two per cent, the slowest pace since April 2021. Rosenberg pointed to "disinflation" spreading in the economy, driven by an output gap where aggregate supply outpaces aggregate demand. He emphasized that any inflation stemming from the Iran war will further strain a weak labor market, as higher energy prices limit incomes and reduce consumer spending power.
This scenario poses additional challenges for policymakers, who must navigate the dual pressures of geopolitical instability and domestic economic fragility. The Bank of Canada is expected to monitor these developments closely, as the interplay between global conflicts and local economic conditions could dictate future monetary policy decisions.
In summary, while recent data indicates a cooling inflation trend, economists caution that the Iran war's impact on gas prices could swiftly reverse this progress, pushing inflation to three per cent or higher and exacerbating weaknesses in Canada's labor market.
