Canada’s annual inflation rate jumps to 2.6% in February as GST holiday ends

Canada’s annual inflation rate showed a surprise jump to 2.6 per cent in February, surpassing expectations as a sales tax break that ended in the middle of last month pushed prices higher amid an already broad-based increase, data showed on Tuesday.

This is the first time in seven months that the rate of increase of consumer prices has crossed the 2 per cent mark, the midpoint of the Bank of Canada’s target range of 1 per cent to 3 per cent. In January, inflation was at 1.9 per cent.

Without the tax break, inflation in February would have been 3 per cent, Statistics Canada said.

The inflation number expanded currency market bets for a pause in the interest-rate-cutting cycle next month to over 70 per cent from 59 per cent before the numbers were released.

The Canadian dollar firmed after the data and was trading up 0.06 per cent at 1.4283 to the U.S. dollar, or 70.01 U.S. cents. Yields on the two-year government bond surged by 5.7 basis points to 2.596 per cent.

On a month-on-month basis, prices rose by 1.1 per cent in February from 0.1 per cent the prior month, Statscan said.

Analysts polled by Reuters had forecast the yearly inflation at 2.2 per cent and 0.6 per cent on a monthly basis in February. The BoC had said last week that it expected inflation to reach 2.5 per cent in March amid price pressures due to tariff-related uncertainty.

While prices increased across almost the entire CPI basket, the major jump was in food purchased at restaurants, some clothing items and alcohol after the tax reprieve was lifted.

“Restaurant food prices contributed the most to the acceleration in the all-items CPI in February,” Statscan said.

Food prices increased 1.3 per cent year over year while clothing and footwear increased by 1.4 per cent on a yearly basis. Other items that added to price pressures in the CPI basket were transportation, which jumped by 3 per cent, and shelter costs, which were up 4.2 per cent.

Economists have said that the sales tax break had distorted overall inflation numbers, and that core inflation was a more accurate gauge of consumer price trends.

The BoC has two preferred measures of core inflation: CPI-median and CPI-trim.

CPI-median, or the centremost component of the CPI basket when arranged in an order of increasing prices, rose to 2.9 per cent in February. CPI-trim, which excludes the most extreme price changes, was also up to 2.9 per cent. Both were at 2.7 per cent in January.