taxation vacation impacts inflation

Today’s release of Consumer Price Index (CPI) data from Statistics Canada brought a notable departure from recent price trends. The annual rate of inflation increased in February, to 2.6%, its highest level since June 2024, after sitting below the Bank’s target rate of 2.0% for three consecutive months. While some of the increase can be attributed to the end of the 2-month GST holiday in the middle of February, price pressures last month were broad based and stretched beyond those goods covered by the holiday. The all-items CPI excluding indirect taxes grew to 2.8% in February, from 2.6% in January.

Two CPI categories that were influenced by the GST holiday both saw a month-to-month increase: food inflation (and within it food from restaurants) grew to an annual rate of 1.3% while alcoholic beverages, tobacco, and cannabis increased to 0.6%. Meanwhile, prices for recreation, education and reading accelerated to an annual increase of 3.7% in February due mostly to higher prices on travel, which were not impacted by GST changes though were likely affected by a weaker Canadian dollar.

Gasoline inflation decelerated last month, due to base year effects, but remained elevated and had an outsized contribution to February’s inflation rate. Look for the gasoline component of the CPI to decelerate further in the months ahead as base year effects work in the other direction and the repeal of the carbon tax takes effect in April.

Shelter inflation—which comprises approximately 30% of the CPI–was once again elevated last month, but continued to fall, to 4.2%. The rent component of the shelter category continued to play an outsized role in driving shelter inflation, with annual CPI rents increasing by 5.8% in February—down from 6.3% in January. As we’ve detailed in the past, this does not align with declines observed in asking rents in Canada’s major markets.

The February inflation release increases the likelihood of the Bank of Canada holding its policy rate at 2.75% at its next announcement on April 16th, after its seventh consecutive cut on March 12th. With its preferred inflation measures of CPI Trim and CPI Median both increasing to the upper end of target range (2.9%), and rising inflation expectations, the Bank will be cautious in its approach. Before the next announcement, however, is the expected implementation of further tariffs (and counter-tariffs) on April 2nd. The Bank will need to weigh reduced demand in the Canadian economy against price increases that result from tariffs. Expect a hold in April as the Bank assesses the impacts of the trade conflict on the Canadian economy, before making further cuts later this year.