Annual inflation rate jumps to 2.6% in February with tax holiday end: StatCan

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OTTAWA — The annual rate of inflation accelerated sharply to 2.6 per cent in February as the federal government’s temporary tax break came to an end mid-month, Statistics Canada said Tuesday.

That marks a sizeable jump from the 1.9 per cent increase seen in January, when Canadians saw GST and HST taken off a variety of household staples, common gifts and restaurant bills for the entire month.

February’s figures are well ahead of the consensus among economists polled by Reuters, which called for 2.2 per cent inflation in the month.

StatCan’s consumer price index is based on final prices paid by Canadians, meaning sales taxes are included in the agency’s calculations.

StatCan calculations show that, without the tax break in place for half a month, inflation would have come in at three per cent in February.

With the tax holiday still in place until Feb. 15, restaurant food prices were down 1.4 per cent year-over-year. But StatCan noted the reintroduction of the sales tax mid-month meant dining out was contributing the most to the acceleration in the overall price index in February.

Alcoholic beverages, children’s clothing and toys were also included in the tax holiday and saw their costs drop similarly in February, but not as much as in January.

The consumer price index rose in every province last month, with Ontario and New Brunswick facing the fastest accelerations.

While gas prices were up 0.6 per cent from January to February, StatCan said the annual comparison showed a deceleration last month, helping to rein in the overall rise in inflation.

Elsewhere, Canadians were paying 18.8 per cent more on travel tours last month. StatCan pointed to increased travel to the United States over the long weekend in February which most provinces observe.

The Bank of Canada’s preferred metrics of core inflation came in “hotter than expected” in February and are poised to keep rising in the months ahead, TD Bank senior economist Leslie Preston said in a note to clients on Tuesday.

The February inflation figures do not directly reflect the imposition of tariffs or counter-tariffs between Canada and the U.S., which went into effect after a series of deadlines and announcements in March.

Economists expect the trade war with the U.S. to drive prices higher in the months to come, though Ottawa’s move to strike the consumer carbon price as of April 1 will take some steam out of the inflation figures next month.

Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, said in a note Tuesday that March’s inflation data will also likely show an uptick with the tax holiday now completely gone from the equation.

“There’s plenty of noise still to come on inflation,” he wrote, which complicates the Bank of Canada’s efforts to set its benchmark interest rate.

The Bank of Canada cut its key rate by a quarter point to 2.75 per cent last Wednesday, with its next decision set for April 16.

Reitzes said he expects the February inflation report will reinforce the central bank’s “cautious tone” on using its policy rate to offset the hit to Canada’s economy from tariffs.

“We’ll see what early April brings on the tariff front, but if the economic outlook doesn’t deteriorate further, the BoC will be considering a pause after cutting at seven straight meetings,” Reitzes said.

Preston said that, based on a forecast where U.S. tariffs remain in place for six months before abating, TD is calling for a pair of quarter-point cuts at the Bank of Canada’s next two decisions.