UBS projects a headline Canadian consumer price index increase of 1.1% on a non-seasonally adjusted (NSA) month-over-month basis in March, which is the largest monthly increase since March 2022.
With this, UBS notes, 12-month inflation will jump up from 1.7% in February to 2.6% in March, and that would be the strongest rate of headline CPI since last February, when the end of the GST/ HST break mid-February boosted the annual rate of inflation. "The unwind of that effect likely depressed the headline inflation rate last month too," UBS said in an overnight note.
Canada is slated to release the March CPI on Monday.
UBS said the key driver of the surge in headline CPI in March is the bank's expectation that energy prices rose 12.3% over the month on an NSA basis, which would be the largest single-month increase in the component, and follows a step to a monthly increase of 2.3% in February. It noted this is a reversal in the recent trend. Energy prices had been weighing on 12-month inflation in Canada and with the strong surge energy prices will flip from being a near 0.5pp drag on annual inflation in February to adding near 0.2pp in March.
In noting the recently announced suspension of the federal fuel excise tax on gasoline, diesel fuel, and aviation fuels to be enacted between April 26 and Sept. 7, UBS said this implies that the impact most likely won't show up in the inflation data until the May print.
Meanwhile, UBS expects that food price inflation picks up after a softer 0.05% rise in February, to something similar to the pace seen in January, rising about 0.5% over the month in March. It noted food price inflation has been a "key part of the basket", keeping headline CPI elevated but with the projected March increase food price inflation should continue to moderate on a 12-month basis to 4.1% from 5.4% in February.
UBS predicts core CPI, which excludes food and energy prices, rose 0.4% over the month on an NSA basis in March, slightly slower than the 0.5% monthly lift in February and stronger than last March. With this, the annual rate of core inflation is expected to rise to 2.17% in March from 1.96% in February. The bank estimates the annual rate of core inflation continuing to bounce above and below 2% for much of the year.