The annual inflation rate held steady at 0.7% in March, unchanged from one month earlier, Statistics Canada reported today.

The year-over-year increases in the consumer price index for February and March are the smallest since December 2001.

Statistics Canada said strong increases in the consumer price index, mainly due to higher energy costs, during the first three months of last year was an important factor in the relative weakness in inflation so far in 2004.

When the eight most volatile components, such as gasoline, tobacco, mortgage interest and some foods, are factored out, the annual core inflation rate rose 1.3% from March 2003 to March 2004, compared with 1.1% in February.

The Bank of Canada’s target rate for core inflation is 2%.

Statistics Canada said higher prices for housing, tuition fees, cigarettes, restaurant meals, and home and vehicle insurance helped push up the annual inflation rate last month.

Those increases were partly offset by lower prices for gasoline, automobiles, fuel oil, computers and natural gas.

In reaction to the March CPI, economists say inflation should be restrained into 2005.

“The bulk of the increases in the CPI during the month were the result of normal seasonal price movements, not true underlying pressure on consumer prices. In sum, notwithstanding the bumps and wiggles in the monthly data, inflation in Canada remains tame as a kitten,” says TD Bank.

BMO Nesbitt Burns says that the monthly increase was largely due to rising gasoline prices, and was the biggest monthly gain in a year. Nesbitt says that this is likely the low point for inflation, and it warns that tougher year-over-year comparisons will drive a big spike next month.

“While headline inflation will rebound towards the mid-point of the Bank of Canada’s target range in the months ahead, core CPI should remain very muted, held in check by the combination of sub-par growth and an improving productivity performance, as well as the lagged impact on last year’s Canadian dollar appreciation on import prices. We continue to see the Bank ‘s key core measure tracking below its 2% target through 2005,” says CIBC World Markets.

“With inflation in the core remaining so tame, it’s economic growth, and specifically disappointments in growth in the second half of 2004, that will set the course of monetary policy,” CIBC concludes.