Jamie Spencer
Canada’s annual inflation rate unexpectedly jumped to 2.6% in February, surpassing expectations as the expiration of a sales tax break pushed prices higher, Statistics Canada reported on Tuesday.
The surprise inflation increase complicates the economic outlook as U.S. tariffs take effect, pressuring businesses and consumers. The Bank of Canada (BoC) had cut interest rates last week to 2.75%, citing economic uncertainty.
Unexpected Price Pressures and Market Reaction
This is the first time in seven months that the inflation rate has exceeded the 2% midpoint of the BoC’s target range. In January, inflation stood at 1.9%. Without the sales tax break, February’s inflation would have been 3%, according to StatsCan.
The Canadian dollar strengthened following the data, rising 0.06% to trade at 1.4283 per U.S. dollar (70.01 U.S. cents). Yields on the two-year government bond surged by 5.7 basis points to 2.596%.
BoC Faces Tough Decisions
The latest figures increased bets that the BoC will pause its interest rate cuts next month, with market expectations rising from 58% to over 62% following the report.
“The unexpected pickup in core measures isn’t good news as this doesn’t yet reflect the impact of tariffs,” said Katherine Judge, economist at CIBC Capital Markets.
BoC Governor Tiff Macklem acknowledged the challenge in an interview with Reuters, stating that the central bank “cannot let the tariff problem become an inflation problem.”
“Containing inflation remains the central bank’s number one job,” said Royce Mendes, Head of Macro Strategy.
Key Inflation Drivers
Prices rose across nearly the entire Consumer Price Index (CPI) basket, with notable increases in:
- Restaurant food prices: A major driver of February’s inflation surge
- Food prices: Up 1.3% year-over-year
- Clothing and footwear: Increased by 1.4%
- Transportation costs: Jumped by 3%
- Shelter costs: Rose 4.2%
Economists suggest that the sales tax break distorted inflation figures and that core inflation is a more accurate measure of consumer price trends.
Core Inflation Remains High
The BoC’s two preferred measures of core inflation both climbed in February:
- CPI-Median: Increased to 2.9% from 2.7% in January
- CPI-Trim: Also rose to 2.9%, up from 2.7% in January
With inflation accelerating and uncertainty surrounding tariffs, the BoC faces increasing pressure to reassess its interest rate policy in the coming months.
