Quick Take

Strong recovery in oil prices spurs inflation in March

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The Conference Board of Canada’s economist Anna Feng offers the following insights on the March Consumer Price Index (CPI):

Inflation surged to 2.2 per cent due to a strong rebound in consumer prices this March compared to extremely low prices in the year earlier period. Rising oil and housing prices were two of the main contributors to the strength in inflation. Given subdued consumer prices last spring, we expect that inflation will continue to trend above 2.0 per cent in the coming months.

  • The Consumer Price Index was 2.2 per cent higher in March than a year ago, doubling the 1.1 per cent growth in February of this year.
  • The surge in March’s inflation stemmed mainly from the muted growth in consumer prices during the early stages of the pandemic last year as well as the strong economic recovery we have seen so far this year.
  • This pattern is clearly seen in the price of gasoline, which is the main upward contributor to March’s inflation readings. Gasoline prices dropped to a 48-month low in March 2020 but has recovered to its pre-pandemic level this March thanks to the recovery in global oil demand and oil production cuts by OPEC.
  • These trends in oil demand and supply led to a 35.3 per cent surge in the year-over-year growth of gasoline prices in March, its largest increase in the past two decades.
  • Excluding gasoline prices, inflation edged up 1.1 per cent in March, a slight increase from the 1.0 per cent growth seen in February.
  • Housing prices continued to trend higher in March due to increasing costs of building materials—mainly lumber—as well as rising demand for larger living spaces during the stay-at-home period.
  • The homeowners’ replacement cost index—an index that measures new home prices—rose 7.9 per cent in March, its highest year-over-year growth since December 2006.
  • Of the eight major components of the consumer price index, household furnishings and clothing are the only two categories that saw their prices decline in March. This suggests that household spending on clothing remained muted and demand for furnishings cooled off slightly.
  • The average of the Bank of Canada’s three core inflation measurements rose to 1.9 per cent in March, staying close to the central bank’s 2.0 per cent target.
  • Overall, March’s inflation figures reflected the improving economic situation since the spring of last year.
  • While household spending hasn’t fully recovered across all categories, especially spending on clothing and traveler accommodation, inflation will shoot up in the coming months as spending on these sectors recovers from extremely low levels in the same period of last year.
  • Core inflation, however, is expected to stay close to 2.0 per cent, as it excludes many volatile items in its calculation.

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Anna Feng

Anna Feng

Economist

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