Canada's latest Consumer Price Index (CPI) release shows headline inflation slowing to 1.8% in February, a notable decrease from 2.3% in January, according to economists at National Bank of Canada (NBC) and Royal Bank of Canada (RBC) [1][2]. NBC attributes the drop to changes in indirect taxes from the previous year, while RBC highlights distortions from last year's GST/HST holiday and the removal of the consumer carbon tax, which affected food and energy prices [1][2]. When indirect taxes are excluded, inflation remains mild at 1.9%, falling below the 2.0% threshold for the first time in 15 months [1]. Shelter inflation, a major component of the index, has moderated to 1.5%, below its pre-pandemic average of 2.2% [1].
Core inflation measures favored by the Bank of Canada (BoC) are rising at an even slower pace. NBC reports these measures averaging 1.0%, indicating widespread price moderation [1]. RBC notes that the BoC's core trim and median CPI measures eased to 2.3% year-over-year, the slowest in nearly five years, and just 1% on a three-month annualized basis, well below the BoC’s 2% target [2]. Both sources agree that core inflation is showing signs of cooling, suggesting easing demand-driven price pressures [1][2].
Despite the positive trend in core inflation, both NBC and RBC warn of looming risks. NBC expects inflation to move toward 3.0% in the coming months as higher oil prices, driven by Middle East tensions, feed through the economy, though they believe core inflation will remain relatively insulated if tensions de-escalate [1]. RBC similarly anticipates elevated oil prices will translate into higher energy inflation in March, and notes ongoing supply-side pressures, particularly in grocery items like beef and coffee, due to production disruptions from adverse weather [2].
Looking ahead, NBC suggests the BoC may have policy flexibility to look through the rise in headline inflation, given contained underlying price pressures and an economy weakened by uncertainty over tariffs [1]. RBC expects the BoC to acknowledge growing external uncertainty at its upcoming meeting but to hold the overnight rate at its current, borderline accommodative level of 2.25% [2].
CONCLUSION
Canadian inflation has cooled, with core measures well below the Bank of Canada's target, but supply-side risks and rising oil prices threaten to push headline inflation higher in the coming months. Both NBC and RBC expect the BoC to maintain its current policy stance, citing contained underlying inflation and external uncertainties. The market takeaway is cautiously optimistic, but vigilance is warranted as supply shocks and geopolitical tensions persist.