Canada’s Inflation Rises to 2.6% in February, Exceeding Expectations

Canada’s annual inflation rate unexpectedly rose to 2.6% in February, surpassing forecasts, as the expiration of a sales tax break mid-month contributed to broader price increases, Statistics Canada reported on Tuesday.

This marks the first time in seven months that inflation has exceeded 2%, reaching the midpoint of the Bank of Canada’s (BoC) 1%-3% target range. Inflation stood at 1.9% in January.

Key Highlights:

• Tax Break Impact: Without the sales tax break, February’s inflation would have been 3%, according to Statistics Canada.
• Policy Implications: Rising inflationary pressure is likely to deter the BoC from cutting interest rates next month, unless economic indicators like GDP and unemployment show significant deterioration.
• Month-on-Month Increase: Prices rose 1.1% in February, compared to a 0.1% increase in January.
• Analysts’ Forecasts: Reuters-polled analysts had expected 2.2% yearly inflation and a 0.6% monthly increase for February.
• BoC Outlook: The BoC had projected inflation to hit 2.5% in March, citing tariff-related price pressures.

Sector-Specific Inflation Drivers:

• Restaurant Food Prices: The largest contributor to February’s CPI acceleration.
• Food Prices: Increased 1.3% year-over-year.
• Clothing & Footwear: Rose 1.4% annually.
• Transportation: Up 3%, reflecting rising costs in the sector.
• Shelter Costs: Remained elevated at 4.2%, further pressuring consumers.

The unexpected inflation surge complicates BoC’s policy path, as it weighs the need for monetary easing against persistent price pressures.