April's inflation report on Tuesday at 8:30 a.m. ET will be closely watched as the surge in oil prices from conflict in the Middle East continues to drive up gasoline prices in Canada, said RBC.
The bank expects headline inflation to rise to 3.1% year over year from 2.4% in March, driven primarily by higher fuel costs. Part of it is due to tax distortions. This April is the first month in a year that annual energy price growth won't be artificially lowered by the removal of the consumer carbon tax in April 2025.
However, gasoline prices also rose another 8% in April after a 21% surge in March, and were up 28% from a year ago, noted RBC. Removal of the 10-cent per liter federal fuel excise tax from April 20 will provide only a small partial offset, and will show up more fully from May onwards.
But, after-tax gasoline prices in May are still running more than 30% above a year ago.
The impact of higher oil prices on energy costs is well-known, so focus will be on the extent to which energy price pressures spread to other broader inflation measures, pointed out the bank.
RBC doesn't expect higher oil prices to re-ignite broader inflation pressures, but that also will depend on the magnitude and duration of the oil price shock. The BoC will continue to watch for any evidence that pressures are spreading.