Consumer prices rose a faster-than-expected 2.2% year-on-year (y/y) in Canada in February (consensus was for 1.9%), up from 1.7% in January.
The acceleration in price growth was broad-based, with all major categories but food and clothing and footwear picking up speed in the month. The biggest gain year-on-year was in energy prices (up 5.3% from 2.4%), but ex-food and energy prices also accelerated to 1.8% year-on-year (up from 1.5%).
The Bank of Canada’s core price measures showed a clear firming trend with the CPI-common moving up to 1.9% (from 1.8%), and both CPI-median and CPI-trim hitting 2.1% (up from 1.9% and 1.8% respectively). As a result, the average of the three measures rose to a hair above 2.0% (from 1.8%) in January.
Key Implications
After several months below 2%, inflation pressures have picked up and have moved on top of the Bank of Canada’s target. As noted, the move higher appears broad-based, as evidenced by all three of the Bank of Canada’s core measures, which aim to strip out idiosyncratic price movements.
The Bank of Canada’s dovish tone of late will surely be challenged in light of today’s robust core inflation numbers. Still, the Bank of Canada’s inflation target is symmetric: a slight overshoot of 2% is no ‘worse’ than an undershoot, and it is possible that minimum wage gains are pushing core measures higher – an impact that should be discounted. All told, today’s data does create the risk that the Bank of Canada moves sooner, but with downside risks to the economic outlook still elevated, this summer remains most likely to see the next policy interest rate hike.
