CPI Growth Dips in February, but Volatility Lies Ahead

In February, the Consumer Price Index (CPI) rose by 1.8 per cent year-over-year (y/y). This was lower than January’s 2.3 per cent increase.

Key insights

In February, the pace of year-over-year CPI growth dipped below the Bank of Canada’s 2.0 per cent target. The deceleration from the previous month largely reflected atypical base effects from last year’s GST/HST holiday, when prices for restaurant meals, toys, and other items were sharply lower (although the tax holiday ended midway through last February). Core inflation measures also decelerated, with the CPI excluding food and energy decelerating to 2.0 per cent (y/y). Gasoline prices remained much lower than a year earlier (–14.2 per cent), and rent prices decelerated to 3.9 per cent from 4.3 per cent in January. The latter slowdown helped pull overall shelter price growth down to 1.5 per cent.

February’s CPI figure may represent the calm before the storm, however, as oil prices have risen sharply. The conflict in the Middle East has already pushed gasoline prices higher in Canada, and March’s CPI release will show accelerating energy costs. As the removal of the consumer carbon tax last year has held down year-over-year gasoline price changes, the unwinding of this base effect in April will see energy price comparisons soar in that month.

Food price inflation also remained elevated in February, though the overall figure is misleading. The pace of growth was boosted by prices for restaurant meals, which are much higher than their tax-free levels during last year’s GST/HST holiday. The restoration of these taxes doesn’t represent an enduring source of upward pressure. At the same time, some grocery items continue to post brisk gains, including meat (which rose by 8.2 per cent (y/y) in February), though overall grocery price growth decelerated to 4.1 per cent from 4.8 per cent in January as the Canadian dollar has strengthened and import costs have eased. If higher energy prices persist, however, pressures on transportation costs will further push up food prices. And, as food and energy are among the most salient prices for consumers, their rise could drive inflation expectations higher.

At the same time, inflationary pressures are being moderated by a sluggish Canadian economy. The latest Labour Force Survey reported a loss of 84,000 jobs in February, led by a sharp decline in full-time positions. Weaker demand—compounded by slower population growth—is easing price pressure from other goods and services. This will act as a deflationary pressure in the months ahead.

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