CPI Growth Jumps in February as GST Holiday Expires

• In February, the Consumer Price Index (CPI) rose by 2.6 per cent (y/y). This was higher than January’s 1.9 per cent (y/y) increase.
• Gasoline prices rose by 0.6 per cent month-over-month and were 5.1 per cent higher than a year ago. Year-over-year, food prices rose by 1.3 per cent (y/y) following a 0.6 per cent decline in January.
• Core CPI (excluding food and energy) grew by 2.9 per cent in February (y/y), higher than its 2.2 per cent increase in January. Several shelter components continue to drive overall CPI growth.
• On a seasonally adjusted basis, the CPI rose by 0.7 per cent in February (following a 0.2 per cent increase in January).
• The average of the Bank of Canada’s two preferred core inflation measures rose to 2.9 per cent in February from 2.7 per cent in January. CPI-median increased to 2.9 per cent (from 2.7 per cent in January) while CPI-trim rose to 2.9 per cent (from 2.7 per cent in the previous month).

Insights

CPI growth picked up sharply in February as the GST holiday ended. Core inflation measures also rose in January and February, suggesting that underlying price growth has accelerated. The weaker Canadian dollar, which has depreciated sharply against the U.S. dollar, continued to feed through to the 13 per cent of the CPI basket linked to imports from the United States. Gasoline prices also remain higher compared to the same month last year. Looking ahead, March’s CPI release will provide a more precise reading of all-items inflation as the impact of the GST holiday fully expires. And, in April, gasoline prices appear set to drop with the removal of the federal consumer carbon tax, which will lower year-over-year CPI growth.

In March, U.S. tariffs and Canadian retaliatory actions will begin to impact Canada’s CPI. Prices for groceries, vehicles, and household appliances will likely rise. Given the anticipation and foreknowledge of these tariffs, the added costs could quickly pass through to consumer prices. However, the ultimate impact of tariffs on prices will depend on the response of consumers and businesses. Firms may absorb some of the increase, lowering profit margins. Canadian consumers may also spend less in anticipation of economic turbulence (the sharp drop in our Index of Consumer Confidence suggests they will), and U.S. consumers may import fewer Canadian goods. The excess supply of these items in Canada could moderate some price increases. Some items, like vehicles, may be subject to further tariffs when new measures are announced in April.

The Bank of Canada is limited in how it can respond to the impact of tariffs on consumer prices. The Bank is already managing expectations about its role in mitigating the economic shock of U.S. tariffs, acknowledging that its policy interest rate cannot act to support weaker economic output and higher inflation at the same time. The Bank is also mindful of an important risk to the inflation outlook; namely, the potential for a one-time tariff-induced price increase to become a more persistent inflationary shock. This could happen if consumer or business inflation expectations become unanchored. Recent survey data from the Bank of Canada shows that inflation expectations have increased. Following the inflation surge of the last few years, Canadians are likely more sensitive to inflation. The spark of higher gasoline or food prices, in particular, could shift inflation expectations higher and ignite further price increases.