Canada’s annual inflation rate jumped to 2.6 per cent in February, according to the latest data from Statistics Canada, sharply exceeding analysts’ expectations and adding to the challenges faced by the Bank of Canada (BoC).
The pronounced rise in inflation comes before a projected spike caused by U.S. tariffs and Canadian countermeasures. The BoC must also factor in weakened economic growth expected as a consequence of the trade war.
Tuesday’s data “put the BoC in a difficult place,” TD Bank economist Leslie Preston said in a note, writing that “Canadians’ inflation expectations have risen” even as tariffs and related uncertainty are slowing demand.
Analysts had expected a rise in February’s inflation figures due to the end of a temporary tax break on GST and HST on some goods, but the increase in prices came in steeper than an analyst consensus of 2.2 per cent, as reported by Reuters.
Statistics Canada’s core measures of inflation, CPI-trim and CPI-median — which strip out tax impacts and which are closely watched by the BoC— each jumped 2.9 per cent from a year ago, a faster rate of increase than the 2.7 per cent seen in January.
“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 per cent year-over-year in the coming months,” CIBC economist Katherine Judge said in a note.
The core measures “are simply too hot and have been too hot in a long stretch back to last May,” Scotiabank economist Derek Holt wrote. That longer-term trend, Holt argues, raises questions about “why the BoC—an inflation-targeting central bank—has been in such a rush to cut to 2.75 per cent for 275 basis points of easing to date.”
On a monthly basis, the Consumer Price Index (CPI) rose 1.1 per cent in February, while on a seasonally adjusted monthly basis, the CPI rose 0.7 per cent. February’s rise came after the CPI inched up to 1.9 per cent in January.
The complexity of the situation for the central bank is reflected in the market’s uncertain expectations for the next rate announcement. Currency swaps put odds of a pause on interest rate cuts at 59 per cent, according to Reuters, while economists’ forecasts are mixed.
TD now expects the BoC “to provide some further cushion” with two more consecutive 25-basis-point cuts, Preston says, while noting that “how tariffs play out remains highly uncertain.” Given the latest data, write National Bank of Canada economists Matthieu Arseneau and Kyle Dahms, “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.”
