EconoFACTS

March 18, 2025 | 09:23

Canadian CPI (Feb.) — Noisy but Hot

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Canadian consumer prices rose a massive 1.1% in February (or 0.7% seasonally adjusted), boosted by the mid-month reversal of the tax holiday, lifting inflation to an eight-month high 2.6% y/y. However, the increase went beyond the tax impact as seasonally-adjusted CPI excluding the tax impact was +0.4%. And, in case you want to pin it on food & energy, CPI excluding food, energy & taxes was +0.3%. Gains were across the board, with the sectors impacted by the tax change seeing the largest increase: recreation +3.4%, food +1.9%, clothing +1.6%, and alcohol +1.5%. There's more to come next month with the tax holiday only ending in mid-February. The headline inflation figures are subject to as much noise as we've seen in decades and that's poised to continue for at least another couple of months, making it very challenging to interpret these figures.

One notable exception to the broad-based strength was shelter, rising "just" 0.2%. That's the smallest gain in five months, trimming the yearly pace to 4.2%, the slowest since 2021, with more downside to come. Mortgage interest costs rose a modest 0.2% for a second straight month, slicing it to +9% y/y, ending a 2½-year run of double-digit increases.

Not surprisingly, the core inflation metrics were firm as well. CPI-Trim and Median both rose 0.3% m/m and 2.9% y/y. The 3- & 6-month annualized rates are all above 3% as well, pointing to ongoing stickiness. The breadth of inflation, which has been a focus for the Bank of Canada, also worsened with the share of items rising 3%+ increasing modestly. None of this is encouraging news for policymakers.

Key Takeaway: This report will reinforce the BoC's cautious tone on easing to mitigate the impact of tariffs. Note that the coming end of the carbon tax will pull inflation down sharply in April, but March could see more upside as the rest of the tax holiday impact reverses. There's plenty of noise still to come on inflation, complicating policymakers' job. We'll see what early April brings on the tariff front, but if the economic outlook doesn't deteriorate further, the BoC will be considering a pause after cutting at seven straight meetings.

Table 1 - Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics