Headline CPI inflation cooled in February to 1.8% year-on-year (y/y) slightly below consensus expectations. The GST/HST break ended partway through February 2025, which lead to large price increases in that month, but puts downward pressure on the year-on-year price change in February 2026.
Energy prices were a source of downward pressure on inflation including gasoline (-14.2% y/y) and natural gas (-17.1% y/y).
There was good news on grocery prices, where inflation cooled to 4.1% y/y in February, down from 4.8% in January. Overall food inflation remained the highest of Statistics Canada’s major categories, up 5.4% y/y.
Shelter inflation continued to cool (1.5% y/y). Inflation eased for rent (+3.9% y/y) and homeowners’ replacement costs (-2.1%y/y) among other subcomponents.
Overall services inflation cooled to 2.7% y/y – the slowest pace since 2021. Another source of downward pressure on services inflation was cellular services, where prices were up only 1.5% y/y after being up 4.9% in January.
The Bank of Canada has focused on broader “underlying inflation” recently, but the official core inflation metrics (median and trim), both cooled further in February to 2.3% y/y. Zeroing in on trends over the past three months, trim and median inflation continued to run well below the Bank of Canada’s 2% target.
Key Implications
Canada’s inflation cooled in February, but that is backward looking now that prices at the pump have skyrocketed in the wake of the U.S./Israeli war with Iran. We expect higher energy costs will lift headline inflation close to 3% in the months ahead, but the effect on the Bank of Canada’s core measures should be more modest. Core inflation is expected to stay reasonably close to the 2% target on a year-on-year basis this year.
The Bank of Canada’s interest rate decision is coming up on Wednesday, and the Bank is universally expected to remain on pause. We will be listening closely for the Bank’s assessment of the impact of the oil shock on Canada’s economy.
