Canadian consumer prices rose 0.5 per cent in February, or 0.1 per cent on a seasonally-adjusted basis, pulling the headline inflation rate down five basis points to 1.8 per cent from January’s 2.3 per cent. However, this data predates the onset of the Iran conflict on February 28. Gasoline prices, down 14 per cent year-over-year last month, are on track to surge as much as 15 per cent month-over-month in March. That move alone could push headline CPI toward 3 per cent in the coming months.
Setting aside the energy shock, the more important signal from this report is that underlying inflation was decelerating materially heading into the conflict. Nearly all major core measures moderated, in most cases more than expected. The Bank of Canada’s preferred metrics, CPI-Trim and CPI-Median, each cooled to 2.3 per cent from 2.4 per cent and 2.5 per cent, respectively. This marks their slowest pace since early 2021. CPI excluding food and energy fell to 2.0 per cent year-over-year, and to just 1.8 per cent when indirect taxes are stripped out. Notably, the three-month annualized trend across the two main core measures has compressed to an average of only 1.0 per cent, the lower bound of the Bank’s target band.
Key contributors to the easing included grocery price inflation, which slowed to 4.0 per cent from 4.8 per cent (though February data were partially distorted by the mid-month expiry of the GST holiday; underlying food categories not affected by the tax also showed some relief). Cell phone services fell 2.8 per cent month-over-month, bringing the annual rate down to 1.5 per cent after peaking near 15 per cent in December. Shelter inflation continued to soften, with the broad owned-accommodation measure slowing to just 0.8 per cent year-over-year, its coolest reading since 2013. Total shelter inflation fell to 1.5 per cent, a five-year low. Even rent inflation has begun to reflect weakness in market prices, decelerating to 3.8 per cent year-over-year, less than half the pace recorded two years ago.
Implication for the Bank of Canada: February CPI came in softer than the consensus expectations. While an oil-driven spike in headline inflation is almost certain, this report confirms that underlying price pressures were on a clear downward trajectory entering 2026. With most core measures near or below the Bank’s 2 per cent target, policymakers have credible grounds to look through the upcoming energy-driven headline move. That flexibility is particularly relevant given that labour market conditions were already softening before the conflict, and uncertainty surrounding USMCA trade arrangements continues to weigh on growth. In our view, the rate path tilts toward easing rather than tightening, though we do not expect any change to the Bank’s policy stance at the upcoming (March 18) meeting.
Independent Opinion
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