Headline CPI inflation increased in February to 2.6% year-on-year (y/y), above expectations and up from 1.9% in January. The GST/HST holiday that ended Feb. 15th, played a key role in higher inflation.
Not surprisingly given the sales tax holiday, restaurant prices contributed the most to the acceleration in headline CPI in February. Prices for food in restaurants were down 1.4% versus a year ago compared to -5.1% y/y in January.
Slower energy price gains at the pump moderated the increase in inflation. Gasoline prices were up 5.1% y/y in February, down from 8.6% y/y in January.
Inflation continued to slow for the key shelter component (+4.2% y/y) and transportation (+3.0% y/y). Shelter has been a major source of inflation in recent years, but should be a moderating force in the months ahead.
The Bank of Canada’s preferred “core” inflation measures were also hotter-than-expected, averaging 2.9% y/y in February, up from 2.7% y/y in January. The trends over the past three months suggest that core inflation is set to head a bit higher in the months ahead, with the three-month annualized pace running slightly above 3% in February.
Key Implications
Headline inflation was a little hotter than expected as the sales tax holiday came to an end. However, the three-month annualized trend in core inflation has been tracking above 3%, signaling that core inflation should continue to grind higher. Our Quarterly Economic Forecast published today shows core inflation rising next quarter as tariffs contribute to price pressures.
This puts the BoC in a difficult place. Canadians’ inflation expectations have risen, but the hit to demand from uncertainty and the tariffs themselves are already weighing on demand. How tariffs play out remains highly uncertain. Our forecast assumes elevated U.S. tariffs over the next six months, and then gradual reductions. In this world, we expect the Bank of Canada to provide some further cushion in the form of two more 25 basis point rate cuts at its next two rate announcements. Markets have lowered their odds of a cut on April 16th slightly in the wake of today’s inflation numbers, but we will know a lot more about the path of tariffs by the time the decision rolls around.
