Inflation jumps to 2.6% in February, as tax holiday ends

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Canada’s inflation rate jumped to 2.6 per cent in February from 1.9 per cent the month before as a federal tax holiday came to an end mid-month.

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The removal of the goods and services tax (GST) and the harmonized sales tax (HST) break that ran from Dec. 14 to Feb. 15, put upward pressure on prices for certain consumer goods, Statistics Canada said on Tuesday. Prices for restaurant food and alcoholic beverages declined less year-over-year in February, than they did in January.

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The Bank of Canada said at its last decision that it expected inflation to rise following the conclusion of the temporary tax break. Tuesdays’ reading puts the inflation rate above two per cent for the first time since October and may prompt the central bank to consider a pause at its April meeting, said economists. The bank’s policy rate is currently 2.75 per cent, after seven consecutive cuts.

“There’s plenty of noise still to come on inflation, complicating policymakers’ job,” said Benjamin Reitzes, economist with the Bank of Montreal, in a note. “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.”

While the central bank remains focused on the trade uncertainty with the U.S., Bank of Canada governor Tiff Macklem said last week policymakers will be watching inflation expectations, as survey data suggests Canadians and businesses expect costs to go up as the result of tariffs.

The inflation reading for February does not reflect the trade conflict with the United States, as tariffs were imposed in March.

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“The Bank of Canada now has a green light to start skipping some meetings,” said David Rosenberg, founder and president at Rosenberg Research Inc., in a note. “Especially with the Fed on hold and the policy rate already some — 150 basis points below U.S. levels — which is not so good for the Government of Canada bond market, but should help underpin the Canadian dollar over the near-term.”

Statistics Canada officials said the consumer price index for February would have been three per cent, absent the GST/HST tax break.

On a year-over-year basis, gasoline prices increased by 5.1 per cent in February, after an 8.6 per cent gain in January. On a month-over-month basis, gasoline prices rose 0.6 per cent.

Core inflation, the measures the Bank of Canada prefers to look at when making its monetary policy decisions, also rose. CPI-common rose by 2.5 per cent year-over-year in February, up from 2.2 per cent in January. CPI-median rose 2.9 per cent, up from 2.7 per cent and CPI-trim rose 2.9 per cent, up from 2.7 per cent.

“The three and six-month annualized rates are all above three per cent as well, pointing to ongoing stickiness,” said Reitzes, in a note. “None of this is encouraging news for policymakers.”

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Katherine Judge, economist with the Canadian Imperial Bank of Commerce, said the Bank of Canada’s decision in April will depend on what happens on the tariff front on April 2, when U.S. President Donald Trump is set to impose reciprocal duties.

“The unexpected pickup in core measures clearly isn’t good news for the Bank of Canada, and this means that the April policy decision hinges entirely on tariff news received in the interim,” she said, in a note.

• Email: jgowling@postmedia.com

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