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Canada Inflation Quickens to 2.6% on End of Sales Tax Break - BLOOMBERG

MARCH 19, 2025

(Bloomberg) -- Inflation in Canada grew at the fastest pace in eight months, further limiting the central bank’s ability to cut interest rates amid a trade war that will both slow economic growth and boost prices.


The consumer price index rose at a 2.6% yearly pace last month, the highest rate since June and up from 1.9% in January, Statistics Canada said Tuesday. The index jumped 1.1% on a monthly basis in February, the fastest pace in nearly three years. Both figures exceeded economist expectations in a Bloomberg survey.

While the second straight acceleration in the headline number is expected, the pace of price gains may still surprise Bank of Canada policymakers, who cut interest rates for the seventh straight meeting last week as Donald Trump’s tariff threats hamper business and consumer spending.

The end of a sales tax holiday in mid-February that had helped keep a lid on food prices added upward cost pressures. But assuming the break hadn’t been in place, inflation would have jumped even higher to 3%, right at the upper bound of the bank’s target range, from 2.7% a month earlier. Canadian inflation has not been at or above 3% since the end of 2023.

The loonie briefly touched the day’s high against the US dollar after the release, then erased gains and traded little changed at C$1.4290 as of 8:43 a.m. in Ottawa. Canada’s benchmark two-year yield rose some five basis points on the session to 2.58%, outpacing developed markets.

Traders in overnight swaps trimmed bets the central bank would cut interest rates by 25 basis points in April, putting the odds at about a quarter, down from roughly 40% previously.

The central bank’s two preferred core inflation measures both accelerated to a 2.9% yearly pace, versus 2.7% in January. The three-month moving averages of the figures rose slightly to 3.3%, from 3.2% previously. The bank has said underlying price pressures may be cooler than the measures indicate and it’s reviewing them as part of its upcoming mandate renewal.

Other core measures also jumped significantly. Inflation excluding food and energy quickened to 2.9% on a yearly basis, from 2.2% previously, while excluding shelter, prices rose 2% year-over-year from 0.9% the previous month.

Still, tariffs remain the biggest factor for the rate path ahead. Trump has already imposed tariffs on a broad range of Canadian goods, including steel and aluminum, and Canada has retaliated with levies of its own. With more US tariffs and Canadian retaliation expected next month, policymakers must weigh downward pressures on inflation from a weaker economy and upward pressures from higher costs.

“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,” Katherine Judge, economist at Canadian Imperial Bank of Commerce, in a report to investors.

Bank of Canada Governor Tiff Macklem said last week the bank would “proceed carefully” amid the tariff war. Economists are still awaiting more clarity on tariffs before firming up their expectations for the next rate decision on April 16, when policymakers will also update their forecasts.

Kyle Chapman, FX markets analyst at Ballinger Group, said while there are a couple concerning elements to the report, it shouldn’t prompt panic. The biggest factor – shelter – is still making steady progress downwards, he pointed out.

“There is one more inflation report to come before the April meeting, but for me this is hot enough to put the Bank of Canada on hold, provided that the tariff story doesn’t blow up,” Chapman said in an email.

Even if Trump broadens tariffs on Canada in April as currently planned, this inflation report reduces the chances of the Bank of Canada cutting again next month, argued Stephen Brown, deputy chief North America economist at Capital Economics.

“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,” Brown said in a report to investors.

The report confirms that inflationary pressures have increased in recent months, Charles St-Arnaud, chief economist at Alberta Central, said in an email. “It is clear that the rising inflationary pressures are broad-based and not due to special factors,” he said.

The sales tax break on a variety of items, making up 10% of the consumer price basket, ended on Feb. 15. Its expiration put upward pressure on costs of food, groceries and alcohol. Restaurant food prices contributed the most to the February acceleration, with a slower decline of 1.4% compared to a drop of 5.1% in January.

Regionally, prices rose at a faster pace in February compared to the previous month in all 10 provinces, with New Brunswick and Ontario seeing the biggest accelerations.

--With assistance from Carter Johnson.

(Adds economist reaction starting in paragraph eight.)

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