February CPI shoots to 2.6% following end of tax holiday

The pace of inflation soared in Canada in February, as the temporary tax holiday came to an end on the 15th, and tariff fears stoked expectations of rising prices.

As reported by Statistics Canada, the Consumer Price Index (CPI) rose 2.6% year over year in February, an eight-month high. While it was expected that this most recent reading would eclipse that of the 1.9% recorded in January (when the tax break was still in effect), growth was still higher than analysts’ forecasted 2.5%.

On a monthly basis, the CPI increased 1.1% from January, and up 0.7% on a seasonally adjusted basis.

The end of the two-month tax holiday

“With the federal tax break ending on February 15, the GST and HST were reapplied to eligible products,” states StatCan’s release. “This put upward pressure on consumer prices for those items, as taxes paid by consumers are included in the CPI.”

As a result, restaurant food prices decreased by a smaller degree, down 1.4% compared to a drop of 5.1% in January; this contributed the most to the increase in growth to February’s CPI, says StatCan. Alcoholic beverages, which were also part of the tax break, saw price declines slow by 1.5%, compared to -3.6% the month prior.

However, the ending of the tax can’t be wholly blamed for CPI’s stronger showing. As BMO economist Benjamin Reitzes writes, “the increase went beyond the tax impact as seasonally-adjusted CPI excluding the tax impact was +0.4%,” with gains across the board.

“There's more to come next month with the tax holiday only ending in mid-February,” he adds. “The headline inflation figures are subject to as much noise as we've seen in decades and that's poised to continue for at least another couple of months, making it very challenging to interpret these figures.”

Other major categories impacting CPI growth included travel tour prices, which rose 18.8% annually, along with passenger vehicle insurance premiums, which increased 7.5%. Gas prices. Meanwhile, slowed, coming in at a 5.1% increase compared to a gain of 8.6%.

There was also easing within the shelter costs category, which ticked up just 4.2% annually, it’s slowest since 2021. This was based on lower mortgage interest costs – which are shrinking alongside interest rate cuts – which rose 9% year over year, down from their previous 10.2%, and a long way from their August 2023 peak of 30.9%. Rent costs are also easing, coming in at 5.8%.

Adding tariffs to the inflation mix

Of course, front and centre are concerns of how threatened blanket import tariffs on Canadian goods to the United States will impact inflation growth in Canada – and what that means for our central bank.

As StatCan writes, “Tariffs affect many facets of the economy, including inflation. The imposition of tariffs by the United States and/or countermeasure tariffs by the Canadian government will have an impact on prices paid by Canadian consumers in the coming months. No special adjustments will be required to the Consumer Price Index for tariffs, as their effect is embedded in the final prices collected.”

Businesses and individuals have started to expect that tariffs will force inflation higher; according to research conducted by the Bank of Canada, households are anticipating CPI will tick up to 4.1% over the coming year, while business owners expect an increase to 3.3%. This is notable because inflation expectations act as a kind of self-fulfilling prophecy; when consumers and businesses bake in the expectation of increased costs, it manifests higher prices.

According to the BoC’s survey, businesses are also experiencing the early effects of the ongoing trade conflict, such as a softer Canadian dollar and complicated supply chains, which are driving up costs. Around half anticipate they’ll need to raise prices should tariffs be imposed on their inputs or products, and three-quarters expect to pass more than half of those tariff-related costs onto consumers.

At the same time, the risks of stagflation (spiking inflation during a recession) are rising; the same survey shows that households are planning fewer big purchases and are reigning in spending, while businesses are paring down their investment and hiring.

How will February CPI impact the Bank of Canada?

None of this bodes well for the BoC, which finds itself between a rock and a hard place on inflation; part of its mandate is to keep the measure within a growth target of 2%, which it does by tweaking its trend-setting overnight lending rate; when inflation runs hot, the central bank hikes this rate to cool spending, and vice versa when the economy is in a slump and needs lower rates as stimulus.

The BoC’s benchmark rate impacts variable-rate loan products including variable-rate mortgages, as well as other personal loans and Guaranteed Income Certificate (GIC) rates.

However, as tariffs are expected to bring upon a recession and economic hardship along with spiking inflation, the BoC will need to weigh its competing priorities.

Without the presence of tariff threats, this most recent inflation reading would have prompted the BoC to start keeping its rate unchanged, following seven consecutive cuts between June 2024 and March 12 of this year. And, in a speech following the central bank’s March 12 rate announcement, BoC Governor Tiff Macklem stated that rate policy isn’t the best tool to counter the effects of tariffs, as the situation requires a two-pronged approach with both fiscal and monetary policy support.

Further complicating the BoC’s next rate decision is stickiness among the “core” measures of inflation – the CPI with various factors stripped out – which it monitors closely. According to StatCan, both the CPI median (the middle-of-the-pack growth within the CPI basket) and the trim (which removes the high and low extremes), both came in at 2.9%, up from 2.7% last month.

As Reitzes writes, “Not surprisingly, the core inflation metrics were firm as well. CPI-Trim and Median both rose 0.3% m/m and 2.9% y/y. The 3- & 6-month annualized rates are all above 3% as well, pointing to ongoing stickiness. The breadth of inflation, which has been a focus for the Bank of Canada, also worsened with the share of items rising 3%+ increasing modestly. None of this is encouraging news for policymakers.”

Overall, he adds, “This report will reinforce the BoC's cautious tone on easing to mitigate the impact of tariffs…We'll see what early April brings on the tariff front, but if the economic outlook doesn't deteriorate further, the BoC will be considering a pause after cutting at seven straight meetings.”

Also read:

• Canadian CPI ticks back up to 1.9% in January
• Inflation and the Consumer Price Index in Canada
• What Canada’s 2-month tax GST tax break means for you
• Bank of Canada cuts target interest rate by 0.25% in March announcement
• How could 25% US tariffs impact Canadian mortgage rates?
• Tariff uncertainty takes a bite out of Toronto February home sales
• How US tariffs on Canada could impact you – and what you can do