Highlights:
- Year-over-year headline CPI growth rose to 2.2% from 1.7% in January
- Annual energy price growth accelerated but ex-food & energy price growth increased to 1.8% on a year-over-year basis from 1.5% in January.
- The Bank of Canada’s preferred ‘core’ measures ticked up to a 2% rate, on balance. CPI-trim and CPI-median both rose to 2.1% from 1.8% and 1.9%, respectively, and the CPI-common measure inched up to 1.9% from 1.8% in January
Our Take:
Year-over-year CPI growth bounced up to a 2.2% rate — the highest since October 2014 — after falling to 1.7% the prior month. A bounce-back in the headline measure was widely expected. The dip the prior month had more to do with unusually high prices in January a year ago than any slowing in underlying inflation trends. Of more interest to policymakers will be the tick higher in the ’core’ measures that generally all firmed in February. Excluding food & energy components, CPI is up 1.8% from a year ago vs 1.5% in January. The Bank of Canada’s preferred core measures edged above the 2% inflation target, on balance. The CPI-trim and CPI-median rose to 2.1% and the CPI-common rose to 1.9%. The numbers can be choppy on a monthly basis — and a portion of the January-February strength is probably tied to recent minimum wage hikes in Ontario. It is difficult, though, to argue that there hasn’t been some firming in underlying price growth. Indeed, by our calculation, the 6-month rolling average of month-over-month gains in the important CPI-trim and CPI-median measures — as well as ex-food & energy CPI — have been tracking closer to 2 1/2% over the last six months.
The economy is probably operating at if not somewhat beyond longer-run capacity limits currently. Inflation now seems to have ticked back up to the Bank’s 2% inflation target. Wage growth is modest but has been edging higher. And yet the overnight interest rate is still 175 basis points below the mid-point of the central bank’s assessment of its long-run neutral level. We expect policymakers to remain cautious about the pace of interest rate hikes in light of trade uncertainty and increased sensitivity of highly leveraged households to rate increases. We, nonetheless, still expect interest rates to grind gradually higher this year and next.
