Canada’s CPI rose 0.9% month on month in March, taking annual inflation to 2.4% year on year. The rise was mainly linked to higher petrol and transport costs.
Core inflation measures eased, including inflation excluding food and energy, and the Bank of Canada’s preferred core metrics. Inflation excluding food and energy moved below 2.0% year on year.
The share of the CPI basket running above 3.0% year on year fell in March. The 3-month annualised pace of core inflation was 1.6%.
Headline inflation above its recent trend is expected to continue into early spring as higher energy prices feed through. The Bank of Canada is expected to keep a cautious, patient approach at its next rate decision.
We remember looking at the inflation report from March 2025, when a spike in gas prices pushed the headline number to 2.4%. However, the Bank of Canada’s preferred core inflation measures were actually getting softer at that time. This reinforced the Bank’s decision to remain patient and not react to what it saw as a temporary jump.
Fast forward to today, April 20, 2026, and the situation has changed. The latest official data shows headline inflation has cooled to 2.1%, but core inflation, which the Bank watches closely, has firmed up to 2.2%. The Bank of Canada, having since cut its policy rate to 4.25% amid slowing growth, now faces a more complex problem than it did last year.
This suggests that derivatives pricing in more rate cuts from the Bank of Canada could be misjudging the Bank’s current focus. We saw them ignore headline inflation in 2025, and now they may ignore a soft economy to focus on this stubborn core inflation. Traders might consider strategies that benefit from the Bank pausing its cutting cycle for longer than the market anticipates.
For the Canadian dollar, this could mean renewed strength, especially against currencies with central banks that are still signalling rate cuts. The Bank’s patience last year gave it credibility, and a hawkish pause now could make the loonie more attractive. This environment could favour currency options that bet on a rising CAD/USD exchange rate in the coming months.
With the unemployment rate now sitting at 6.5%, up significantly from 5.8% in early 2025, the Bank is balancing a weak job market against sticky underlying prices. This creates uncertainty and points towards potential volatility around upcoming interest rate decisions. Therefore, options that profit from a sharp move in interest rates in either direction, such as straddles, could be effective tools.
