Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation jumped to 2.6% in February, much stronger than expected, yet remaining in line with the BoC’s inflation target. While some of the upside surprises can be attributed to the end of the GST holiday, other factors also contributed to higher inflation. As such, excluding the effect of indirect tax, CPI rose by 0.7% m-o-m, pushing the y-o-y higher at 2.9%, at the upper end of the BoC’s inflation target. Similarly, the average of the Bank of Canada’s core inflation measures rose to 2.90% and remained below 3% (the upper band of the inflation target) for the eighth consecutive month.
The breadth of inflationary pressures increased in February. The share of components of CPI rising by more than 5% was 19% in February, compared to 15% in January, and the share of components increasing by more than 3% rose to 35% from 31%. Both measures have bottomed out and are marginally above their historical norm (see Fig 1.), suggesting some stickiness and broadening in inflation.
The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures remained elevated in February. As such, we observe that the 3-month annualized changes in the main CPI components are all above 3% (see Fig. 2), except for health and personal care (+1.9%), with the 3-month annualized change in headline CPI at 4.3%. While the GST holiday is having a significant push on the momentum measures, CPI excluding the effect of indirect taxes has a momentum at 5.1%, significantly above the BoC’s target.
Similarly, the momentum of BoC’s core measures remained above 3% in February at 3.32% for a fifth consecutive month (see Fig 2). This suggests some stickiness in the core measures and some stronger price pressures in recent months despite the GST holiday.
We would also note that the momentum in good prices (+6.0%) is much higher than for services (+3.9%). This suggests that inflationary pressures in recent months have been more severe for goods than for services. This may suggest that some of the upside pressures are due to some pass-through from previous Canadian dollar depreciation
Overall, the report confirms that inflationary pressures have increased in recent months, and the GST holiday has obscured the true extent of these pressures. It is now clear that inflationary pressures are sticky, and prices have increased faster in recent months than the BoC would like to see, with the momentum in various core measures above 3%.
The rising and broadening inflationary pressures are complicating the BoC’s task and its responses to US tariffs, as they reduce its ability to cut rates in response to a slowing economy. It also means that the likelihood of the BoC cutting rates in April is significantly reduced.
In Alberta, inflation rose to 2.8% in February. An acceleration in food prices, due to the end of the GST holiday, was the main source of upward pressure on inflation. Shelter costs decelerated to 3.2% y-o-y, its slowest since February 2023, contributing 0.9pp due to rent and ownership costs. Inflation excluding food and energy (a core inflation measure) rose to 3.1%, surpassing the national measure and one of the highest rates among the provinces.
We also note a sharp regional disparity, with inflation above the national measure in all provinces West of Ontario (including Ontario) and lower than the national measure in the East.
The Consumer Price Index (CPI) increased 1.1% m-o-m non-seasonally-adjusted in February and the inflation rate rose to 2.6%, its highest level since mid-2024. This was much stronger than expected. The end of the temporary GST holiday introduced in December 2024 pushed many components of CPI higher. As a result, food prices increased by 1.9% m-o-m, clothing by 1.6% m-o-m, and alcohol, tobacco and cannabis by 1.5% m-o-m%.
Nevertheless, the increase in inflation was not only due to the end of the tax holiday. Excluding the impact of the change in indirect tax, CPI was up 0.7% m-o-m in February and 2.9% y-o-y, compared to 2.6% in January and 1.7% y-o-y in November.
On a year-on-year basis, six of the eight major CPI components accelerated in January. The only sectors showing a deceleration were shelter and transportation costs. Transportation costs decelerated to 3.0% y-o-y from 3.4%, contributing 0.5pp to inflation, mainly due to a slower increase in gasoline prices (+5.1% y-o-y).
Shelter cost inflation eased to 4.2%, its lowest since May 2021, and remained the main source of inflation, contributing 1.2pp to headline inflation, mainly due to higher rent (contributing 0.4pp) and mortgage interest costs (contributing 0.5pp).
Food price inflation jumped to 1.3% y-o-y (adding 0.2pp to inflation), as a result of the end of the GST holiday which pushed the cost of food purchased from restaurants 4.3% higher in February. and was the main source of drag on inflation in January (reducing inflation by 0.2pp).
Recreation, education and reading costs rose 3.7% y-o-y in February (contributing 0.4pp to inflation) due to a sharp increase in the travel service costs (+17.2% m-o-m).
After being a drag on inflation in January due to the GST holiday, clothing and footwear cost increase in February (+1.4% y-o-y).
In February, goods price inflation accelerated to 1.5% and service prices inflation rose to 3.6 %. Energy prices pushed inflation higher, increasing by 3.0% y-o-y compared to the same month last year, after a rise of 5.3% y-o-y in January. Excluding food and energy, prices eased 0.9% m-o-m in February and increased by 2.9% 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, rose to 2.7%, its highest in a November 2023.
Looking at the BoC’s core measures of inflation, they increased in February and were barely below 3%. CPI-Trim was 2.9%, after 2.7% in January, while CPI-Median was 2.9% after 2.7% the prior month. As a result, the average of the two measures rose to 2.90%, below 3% for eleventh consecutive month.
By provinces, headline inflation was the highest in Manitoba (+3.5%), Saskatchewan (+3.1%), BC (+3.0%), Alberta (+2.8%), and Ontario (+2.7% y-o-y), while it was the lowest in Newfoundland (+1.2%), PEI (+2.0%), and Quebec (+2.0%).
Core inflation, or CPI excluding food and energy, with the highest in %), Ontario (+3.2%), Alberta (+3.1%), BC (+2.9), and Saskatchewan (+2.7%). It was the lowest in Newfoundland (+1.2%), New Brunswick (+2.1%),and PEI (+2.3%).
In Alberta, prices increased 0.8% m-o-m and inflation increased at 2.8% in February, remaining amongst the highest at the provincial level. Three out of eight CPI components decelerated on the month. Shelter costs decelerated to 3.2% y-o-y from 4.9% y-o-y and remained the main source of inflation, contributing 0.9 percentage points to inflation. Rent costs decelerated to 4.1% y-o-y (contributing about 0.2pp to inflation) from 7.2% y-o-y but are no longer rising faster than in other provinces. Owned accommodation costs also decelerated to 5.5% y-o-y (contributing 0.9pp to inflation) from 6.1% y-o-y.
Food prices inflation increased to 2.1% y-o-y from 0.5% y-o-y, as a result of the removal of the GST holiday.
Transportation costs decelerated to 4.4% compared to last year, as a result of a slight decrease in gasoline prices from (+18.9% y-o-y) in January to (+12.1% y-o-y). This component contributed 0.8pp to inflation.
Goods price inflation increased to 1.7% y-o-y from 1.6% y-o-y, and services prices inflation increased to 3.7% y-o-y from 3.4%. Inflation excluding food and energy accelerated to 3.1%, which is higher than the national measure. Energy costs eased to 0.8% y-o-y compared to 6.6% y-o-y in January.
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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.