Price Growth Eased in February, But New Risks Have Appeared on the Bank of Canada’s Radar

  • In February, the Consumer Price Index (CPI) rose by 5.2 per cent (y/y). This was lower than January’s 5.9 per cent (y/y) increase.
  • Gasoline prices fell by 1.0 per cent (m/m) and were 4.7 per cent lower than a year ago. Year-over-year, food prices increased in stores (+10.6 per cent) and restaurants (+7.7 per cent).
  • Core CPI (excluding food and energy) grew by 4.8 per cent in February (y/y), lower than the 4.9 per cent increase (y/y) in January. Higher prices in several shelter and food subcategories were key contributors to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI grew by 0.1 per cent in February (compared to a 0.3 per cent increase in January).
  • The average of the Bank of Canada’s three core inflation measures fell to 5.4 per cent in February from 5.6 per cent in January. CPI-median dropped to 4.9 per cent, CPI-common dipped to 6.4 per cent, and CPI-trim fell to 4.8 per cent.

Key Insights

  • In line with expectations, headline inflation continued to ease in February. Price growth for much of the consumer price index (CPI) basket remains higher than 3 per cent year-over-year, but a handful of goods and services prices are contributing disproportionately to overall CPI growth. For example, in February, mortgage interest costs grew by 23.9 per cent (y/y). Prices of food purchased in stores posted double-digit year-over-year growth for the 7th consecutive month as some retailers lifted price freezes. We expect that these trends will continue as a larger share of Canadian mortgages is renewed at higher rates and as a cornucopia of factors, including elevated levels of supplier price increase requests, keeps food price inflation aloft.
  • Wage growth has been out of step with productivity growth, and this imbalance isn’t sustainable for bringing inflation back down to 2 per cent. It’s a worrying trend that was flagged in the Bank of Canada’s last interest rate press release. Weak economic growth during the latter half of this year will drag labour demand and deflate the pace of wage growth. This should help to rein in Canadians’ inflation expectations which have plateaued but remain elevated. Lower inflation expectations, in turn, should cool wage growth expectations and ease inflationary pressures.
  • What’s next for interest rates? Higher interest rates and their demand-lowering effects remain essential for bringing inflation back to the Bank of Canada’s target. The Bank has paused its rate hikes to gauge the impact they’re already having. However, the banking turmoil in the United States and Europe may incentivize the Bank to hold this pause or even lower rates to avoid undue financial strain in Canada. Together with other central banks, the Bank of Canada has already taken some exceptional steps to ease anxious global financial markets. Weighing the potential risks of higher rates leading to financial trouble in Canada against controlling inflation will remain top-of-mind for the Bank’s forthcoming interest rate and quantitative tightening decisions.