Inflation surprises in February: What the economists say

Article content

Canada’s inflation numbers for February flummoxed analysts again, slowing to 2.8 per cent year over year instead of rebounding to 3.1 per cent as most analysts predicted.

In January, the headline number for the consumer price index (CPI) came in at 2.9 per cent, also lower than analysts expected.

Article content

Here’s what economists think February’s surprise fall could mean for the Bank of Canada and interest rate cuts.

Article content

April cut ‘unlikely’: Capital Economics

The Bank of Canada’s preferred measures of inflation fell below the three per cent target for the first time since April 2021, Stephen Brown, deputy chief North America economist for Capital Economics Ltd., said in a note.

CPI-trim and CPI-median slowed to 2.9 per cent on a three-month annualized basis, falling within the central bank’s inflation target range of one per cent to three per cent.

“While the data support our view that inflation will fall to two per cent sooner than the bank anticipates,” he said, “governor Tiff Macklem has told us that the bank needs to see at least ‘a few’ encouraging data points before it cuts interest rates.”

The Bank of Canada announces its next decision on April 10, but Brown thinks a cut at that meeting is unlikely.

“Our forecast for a cut in June is arguably now looking more likely than the 70 per cent probability currently priced into markets,” he said.

‘Sigh of relief’: Desjardins Group

“Monetary policymakers will be able to breathe a sigh of relief after seeing these numbers,” Royce Mendes, managing director and head of macro strategy at Desjardins Financial, said in a note.

Article content

Article content

Inflation is weaker than the Bank of Canada previously estimated and February’s CPI report provides proof of that, he said, pointing out that core inflation, excluding food and energy, slowed to 2.8 per cent from 3.1 per cent in January.

Prices have cooled across a broad swath of components in the CPI basket, with the share of items rising more than three per cent — “a metric closely watched by governor (Tiff) Macklem” — shrinking to 40 per cent from 45 per cent.

“We expect central bankers will sound more dovish in April, thereby setting up a rate-cutting cycle beginning in June,” Mendes said.

‘Ample evidence’: Canadian Imperial Bank of Commerce

“There was unambiguously good news on the inflation front in Canada in February,” Katherine Judge, an economist at CIBC Capital Markets, said in a note.

It was the second consecutive time inflation came in cooler than expected, and provides “ample evidence that higher interest rates are working to tame inflation,” she said.

Article content

Judge said the Bank of Canada will bypass “volatile” items such as gasoline and grocery prices in its analysis of the data to get a “better signal” from the core numbers.

“On that score, virtually every core measure looked more encouraging,” Judge said, highlighting that services, excluding shelter, slowed to 1.6 per cent year over year.

That shows weak consumer demand is taking its toll on services and likely translates to a slowing in wage growth, something the Bank of Canada said it needed to see before it would start cutting interest rates.

“This report is clearly encouraging from the Bank of Canada’s perspective … even though they will likely want to wait to see more evidence of the labour market loosening before pulling the trigger on interest rate cuts in June,” Judge said.

• Email: gmvsuhanic@postmedia.com

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content