Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation decelerated to 2.8% in February, weaker than expectations. The lower inflation rate is largely the result of lower prices for mobile phones and internet plans, continued sales at clothing and footwear retailers, and slower food inflation. Nevertheless, shelter costs continued to accelerate, reaching 6.5% y-o-y. The Bank of Canada’s measures of core inflation eased further in February to their lowest level since August 2021 at 3.15%, slightly above the target.
In addition, inflationary pressures continued to narrow in February, with 21.5% of the components of CPI rising at more than 5%, compared to 27.5% in January. Similarly, the share of components increasing by more than 3% eased to 41% from 45% (see Fig 1.). The decline in these measures suggests many CPI components decelerated in February and both measures are at their lowest since the summer of 2021, indicating a narrowing in inflationary pressures. However, both measures remain above their historical norm.
The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures eased in February and is more consistent with the BoC target. As such, we observe that many of the 3-month annualized changes in some key CPI components eased further but some, likely shelter, remained above 3% (+4.8%) (see Fig. 2). The 3-month annualized changes in headline CPI is now at 1.3 %, after 1.8% in January.
Most importantly, the momentum of BoC’s core measures was 2.2% on average. This is the first time since February 2021 that the momentum in the BoC’s core measure of inflation is below 2.5% (see Fig 2). The slower inflation momentum suggests that the underlying inflation dynamic has slowed to a pace consistent with the BoC’s target.
The broad easing in inflationary pressures in February will provide some relief for the BoC. However, as we have mentioned repeatedly (see), in our view, the BoC is unlikely to consider cutting rates until the momentum measure for the preferred core measure returns sustainably well below 3%, meaning that its preferred measures of core inflation are below 3% and that their momentum is around or below 2.5%. This is because inflation expectations and perceived inflation remain elevated. While the first condition has been met, the second could be reached in April, supporting our view that the BoC will cut its policy rate at the June meeting.
In Alberta, inflation accelerated to 4.2 % in February. A sharp increase in natural gas prices in February and higher electricity costs compared to last year due to a base effect were big contributors to the higher inflation. As a result, shelter costs accelerated to 12.8% y-o-y, contributing 3.3pp percentage points to inflation. Food prices decelerated and remained one of the main sources of inflation, adding 0.7pp to headline inflation. Inflation excluding food and energy (a measure of core inflation) edged higher to 2.9% and was above the national measure for the first time since January 2023.
The Consumer Price Index (CPI) rose 0.3% non-seasonally-adjusted in February and the inflation rate eased to 2.8%. This was lower than expectations for a second consecutive month. Prices decreased in three of the eight major CPI components in the month, led by clothing and footwear (-1.1% m-o-m), as a result of seasonal sales, and household operations, furnishing and equipment (-0.2% m-o-m), due to lower cost for internet access (-9.4% m-o-m) and mobile phone plans (-3.5% m-o-m). The biggest prices increase in February was in recreation. Education and reading (+1.6% m-o-m), due to higher travel services costs (+9.3% m-o-m). Transportation cost also rose in February, due to a 4.0% jump in gasoline prices.
Four of the eight major CPI components decelerated in February on a year-on-year basis. However, shelter costs inflation accelerated to 6.5% y-o-y, from 6.2% y-o-y. It remains the main source of inflation, contributing 1.8 percentage points (pp), with about 1.0pp attributable to higher mortgage interest costs and 0.55pp due to higher rent.
Transportation costs also accelerated to 2.2% y-o-y from 1.2% y-o-y in February due to higher gasoline prices (+0.8% y-o-y), insurance costs and repair costs.
Household operations, furnishing and equipment was the main source of drag on inflation. The component declined by -1.7% y-o-y and reduced headline inflation by 0.2pp, due to lower prices for mobile and internet services (-16.7% y-o-y).
Clothing and footwear was another important source of deceleration, easing to -4.2% y-o-y from -1.3% y-o-y, reducing inflation by 0.2pp. Bigger seasonal sales at retailers this year, likely due to weak sales, could explain the lower prices.
Food price inflation was another source of deceleration in the headline, increasing at a slower 2.8% y-o-y in February and contributing 0.5 percentage points (pp) to headline inflation. Statistics Canada notes that it is the first time since October 2021 that food inflation has been below the headline.
In February, goods price inflation eased to 1.2% from 1.3%, while services inflation was unchanged at 4.2%. Energy prices are 1.3% higher compared to the same month last year, after declining 2.7% y-o-y in January. Excluding food and energy, prices increased 0.2% on the month and increased by 2.8% compared to the same month last year. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, eased to 2.1%, close to the mid-point of the Bank of Canada’s operational target.
Looking at the BoC’s core measures of inflation, they were all lower in February. CPI-Trim eased to 3.2% from 3.4%, while CPI-Median declined to 3.1% from 3.3%. As a result, the average of the two measures inched lower to 3.15%, its lowest since August 2021.
In Alberta, inflation rose to 4.2% from 3.4% in February. Only three out of eight CPI components decelerated on the month. Shelter costs accelerated to +12.8% y-o-y and was the main source of the higher inflation, contributing 3.3 percentage points to inflation. The higher shelter costs were due to a sharp rise in natural gas costs in February (+17.3% m-o-m, +15.1% y-o-y), higher electricity costs compared to last year (+113.42 y-o-y) and an increase in rent (+14.2% y-o-y) and owned accommodation costs (+8.0% y-o-y).
Food prices decelerated to 3.9% y-o-y, but remained an important source of inflation in the province, contributing 0.7pp. Transportation costs increased 3.2% compared to last year, due to a rise in the price of passenger vehicles and gasoline prices (+6.4% y-o-y). The component contributed 0.5pp to inflation in January.
Household operation, furnishing and equipment costs were drag on inflation than in February, declining 2.0% y-o-y. As a result, the sector reduced inflation by 0.3 percentage points. Similarly, clothing and footwear prices fell 5.4% y-o-y, reducing inflation by 0.3pp.
Goods prices inflation rose to 3.8% from 2.6% and services prices to 4.5% from 4.1%. Inflation excluding food and energy edged higher to 2.9%, while energy costs rose 22.3% y-o-y.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.