Higher February Inflation Rate Clouds Interest Rate Outlook

Canadian inflation ran hotter than expected in February, even before the impacts of a potential trade war with the US are felt. 

Statistics Canada reported Tuesday the consumer price index was up 2.6% year-over-year in February. That followed a 1.9% increase in January and exceeded the expectations of most analysts and economists. The increase also comes before consumers face the likelihood of higher prices caused by the imposition of US tariffs and Canadian retaliatory tariffs. 

The higher inflation rate also casts considerable uncertainty over what course the Bank of Canada will now chart with interest rates. The Bank last week cut its key overnight lending rate by 25 basis points to 2.75%, partly due to economic jitters caused by the possible trade war. However, a trade war could also further increase consumer prices while also dampening economic growth, putting the Bank in a difficult position. Typically, the Bank will increase interest rates to control inflation and reduce rates to stimulate economic growth. 

In its report today, StatsCan said the end of the federal government’s tax break on certain items, as of Feb. 15 contributed to last month’s higher inflation rate. For example, prices for food purchased from restaurants declined at a slower pace year over year in February (-1.4%) compared with January (-5.1%). In fact, it was restaurant food prices that contributed the most to the acceleration in the all-items CPI in February, StatsCan said.