Canada: Inflation Cools in February Ahead of the Spike in Oil Prices

Headline inflation decelerated sharply in February, with base effects stemming from the GST/HST holiday External link. a year ago partly coming out of the year-over-year calculus. Services prices fell to 2.7% y/y, down from 3.4% in January (graph 1). Under the hood, restaurant prices rose 7.8% in February, still elevated but below the breakneck pace of 12.3% in the previous month. In addition, alcoholic beverages purchased from licensed establishments (6.8% y/y) and from stores (5.6% y/y) saw price pressures slow but remain elevated. Toys, games and hobby supplies, and children’s clothing also received honourable mentions in Statistics Canada’s writeup due to the GST/HST holiday. Moreover, the price of cellular services saw a modest increase (1.5%) as compared to January (4.9%), likely due to lower-priced plans from multiple wireless service providers. 

On the whole, goods prices slowed to 0.5% y/y in February compared to 0.9% in the prior month. Gasoline prices did not fall as sharply (-14.2%) relative to January (-16.7), as crude oil prices started rising in the lead up to the conflict in Iran. That said, headline inflation would have been about 0.4 percentage points higher in February, at 2.2%, if it weren’t for the elimination of the consumer carbon tax (graph 2). Grocery prices increased again in February (+4.1%). Under the hood, meat prices posted the largest monthly decline in five years (-1.5% m/m). Still, grocery prices are likely to stay high, according to our analysis External link..

Turning to underlying CPI inflation, the average of the BoC’s preferred measures of core inflation—CPI median and trimmed mean—slowed in February to around 2.3% y/y. Total CPI inflation excluding food and energy shifted down notably to 2.0% from 2.4%. Total CPI inflation excluding the eight most volatile components moved down to 2.3%. Meanwhile, its annualized seasonally adjusted 3-month moving average accelerated from 2.0% in January to 2.3% in February (graph 3). In contrast, when this same calculation is applied to the average of the Bank’s preferred measures, it declined from 1.2% in January to 1.0% last month—the slowest pace since July 2012, outside of the pandemic. 

The slowdown in inflation was broad-based in February. However, the conflict in Iran is a significant upside risk to price growth. At the time of the February CPI release, the benchmark West Texas Intermediate oil price is close to US$100 per barrel, broadly in line with the severe disruption scenario outlined in our research External link.. That said, the upcoming Canada-United States-Mexico Agreement (CUSMA) review External link. remains a significant downside risk to the overall outlook. Given the uncertain and offsetting potential impacts on inflation, we believe that the Bank is likely to remain on the sidelines for the foreseeable future.