Canada’s Consumer Price Index shot up 2.6% annually in February, blowing past estimates of 2.3% and clocking the sharpest increase in eight months, as the effects of the federal sales tax break tapered off.
While an increase in inflation was widely expected, analysts were surprised by the magnitude of the jump from the 1.9% reading in January. The report from Statistics Canada revealed inflation quickened to 1.1% on a monthly basis, the fastest in almost three years.
Economists say the Bank of Canada, which cut interest rates just last week, will likely put additional cuts on hold. This marks yet another swing in expectations for the Bank’s policy. More reductions were seen as likely in the months ahead, as it is believed tariffs will slow economic growth.
February CPI Increase Fueled by End of Tax Break
The broad-based burst in February inflation was driven by the end of the sales tax holiday on Feb. 15, which led to upward pressure on the prices of goods previously exempt under the government program.
Continuing the previous month’s trend, core inflation accelerated further, with trim and medium inflation surging to 2.9% from 2.7% in January. Economists point out that these numbers fall outside the comfort zone of the central bank’s policymakers.
Core inflation measures provide a clearer picture of underlying inflation trends, as they strip out more volatile elements of the CPI. Trim inflation excludes the most extreme price changes from a selection of goods and services. Median inflation tracks price changes at the midpoint of the CPI basket of goods. Shelter prices (rent and mortgage costs) rose 4.2% annually and 0.2% monthly.
Here are highlights from analyst commentary on the February CPI report.
Charles St-Arnaud, chief economist at Alberta Central
“Overall, the report confirms that inflationary pressures have increased in recent months, and the GST holiday has obscured the true extent of these pressures. It is now clear that inflationary pressures are sticky, and prices have increased faster in recent months than the Bank of Canada would like to see, with the momentum in various core measures above 3%.
“The rising and broadening inflationary pressures are complicating the Bank of Canada’s task and its responses to US tariffs, as they reduce its ability to cut rates in response to a slowing economy. It also means that the likelihood of the Bank of Canada cutting rates in April is significantly reduced.”
Benjamin Reitzes, Canadian rates managing director and macro strategist at BMO Economics
“The breadth of inflation, which has been a focus for the Bank of Canada, also worsened with the share of items rising 3%+ increasing modestly. None of this is encouraging news for policymakers.
“This report will reinforce the Bank of Canada’s cautious tone on easing to mitigate the impact of tariffs. Note that the coming end of the carbon tax will pull inflation down sharply in April, but March could see more upside as the rest of the tax holiday impact reverses. There’s plenty of noise still to come on inflation, complicating policymakers’ jobs. We’ll see what early April brings on the tariff front, but if the economic outlook doesn’t deteriorate further, the Bank of Canada will be considering a pause after cutting at seven straight meetings.”
Stephen Brown, deputy chief North America economist at Capital Economics
“The large upside surprise to headline inflation in February, together with another set of above-target consistent gains in CPI-trim and CPI-median, reduces the chance of the Bank of Canada cutting interest rates again in April – even if President Trump broadens the US import tariffs on Canada as is currently scheduled.
“Indeed, the bad news for the Bank was that CPI-trim and CPI-median once again rose by an average of 0.3% m/m, which caused the average three-month annualized rate to tick up to 3.3%. Moreover, with shelter prices rising by a softer 0.2% in February, the Bank cannot continue to blame them for keeping its preferred core inflation measures elevated, with the average annual rate now at 2.9%. The upshot is that, despite the downside risks to the economic outlook from US tariffs, we may need to revisit our view that the Bank will cut interest rates again as soon as next month.”
Katherine Judge, executive director and senior economist at CIBC Capital Markets
“Canadian inflation accelerated sharply in February, as the temporary GST holiday came to an end in the middle of the month, leaving annual inflation at 2.6%, up from 1.9% in the prior month, and well above the consensus expectation of 2.2%.
“Overall, the unexpected pickup in core measures isn’t good news as this doesn’t yet reflect the impact of tariffs, which will see headline CPI exceed 3% y/y in the coming months.”
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“Given the tariff-related rise in inflation expectations and the recent momentum in actual price growth, it now seems likely that the Bank of Canada will pause its rate-cutting cycle in April, at least temporarily. Officials debated whether to hold rates steady earlier this month, but ultimately chose to lower the policy rate by another 25 basis points.
“Still, the decision to ease came with a stark warning that further cuts were not a foregone conclusion. With price growth likely to accelerate in the months to come as a result of retaliatory tariffs and past currency depreciation, now seems like the right time for the Bank of Canada to take a hawkish detour, driving home the point that containing inflation remains the central bank’s number one job.”
Matthieu Arseneau, economist at the National Bank of Canada
“The data published this morning by Statistics Canada is enough to shake observers’ convictions about the inflation situation in the country. An acceleration of inflation was certainly inevitable in February with the end of the GST holiday in the middle of the month, which will also have an upward impact in March.
“There is no doubt that the Bank of Canada was surprised by the recent price developments in a context where the economy had started to improve. In such a context, there is a strong chance that the rate cut we were expecting in April will not materialize unless the economy deteriorates very rapidly in a context of tariff uncertainty. It remains that inflation is a lagging indicator, and the central bank may once again focus on economic variables that could weaken rapidly in the coming months if there is no improvement in trade relations with the United States. That scenario would justify lower path for the policy rate.”
Claire Fan, senior economist at Royal Bank of Canada
“The increase in year-over-year CPI reading in February was mostly a result of the end to a temporary GST tax holiday. As much as those signs are alarming, they’re too early to be tariff-related and are more likely a product of gathering strength in consumer spending since late last year. Moving forward, headline inflation will continue to be influenced by one-off factors as retaliatory Canadian import tariffs increase import costs but the removal of the consumer carbon tax lowers prices, particularly for energy products starting in April.
“Today’s numbers won’t have been a surprise to the Bank of Canada. The readings will, however, continue to complicate the central bank’s interest rate decisions. When cutting the overnight rate by another 25 basis points in March, the central bank said explicitly support of lower interest rate should not be at the cost of sacrificing the longer-run 2% inflation target. We expect the Bank of Canada will take into account all these moving parts, including the potential new round of broader ‘reciprocal’ tariffs that the US administration threatened against all trade partners for April 2 when making the next decision in April.”
Tu Nguyen, economist at RSM Canada
“The increase from 1.9% in January is unsurprising but greater than expected. Core inflation measures also climbed, showing some inflationary pressures remaining. Nonetheless, this is still the calm before the storm. March and April will see the Consumer Price Index increase even further, as the tax break will be fully gone, especially because these months will reflect the impact of tariffs.
“Earlier this month, the US government imposed broad-based tariffs on all Canadian imports not currently covered under CUSMA, and the Canadian government retaliated with tariffs on select US imports. Some of these price increases in imports will be passed on to consumers and show up in the CPI index in the upcoming months. The cancellation of the consumer carbon pricing will unlikely lead to a noticeable decrease at the pump since gasoline prices climbed over time with the gradually increasing carbon pricing. Now, it will take time for gasoline prices to drop.”
Derek Holt, vice president and head of capital markets economics at Scotiabank Economics
“This latest reading is no flash in the pan. They show the readings in month-over-month terms at a seasonally adjusted and annualized rate in order to capture inflation pressures using the most timely measures. They are simply too hot and have been too hot for a long stretch back to last May. The longstanding trend points to readings that are clearly saying that the BoC’s work is not done. They question why the Bank of Canada —an inflation-targeting central bank—has been in such a rush to cut to 2.75% for 275 basis points of easing to date.
“Canadian inflation spiked higher and further reduces prospects for additional rate cuts by the Bank of Canada. The end of the GST/HST cut was only a modest part of the explanation. The bigger issue is that the Bank of Canada’s preferred core readings—that exclude taxes—were hot again.”
Leslie Preston, managing director and senior economist at TD Bank
“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 Bank of Canada 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 16 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.”
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