Canadian Analysis

The Bottom Line:

Headline inflation slowed to 1.8% in February, though comparisons remain distorted by last year’s GST/HST holiday (which extended through mid-February) biasing food prices higher, and the removal of the consumer carbon tax in April 2025, which depressed energy CPI.

The Bank of Canada’s core trim and median CPI measures—which exclude volatile monthly swings and indirect tax changes— offer clearer reads. In February, they continued to ease and averaged 2.3% year-over-year, the slowest pace in almost five years. On a three-month annualized basis, these measures averaged just 1% in February, well below the Bank of Canada’s 2% target.

While the moderation in those core CPI measures is welcome as it suggests easing demand-driven inflation pressure, Canadian households continue to face supply-side headwinds, particularly in grocery items like beef and coffee where production disruptions from adverse weather take time to resolve.

That won’t be the last of supply-driven inflation: elevated oil prices from ongoing Middle East tensions will translate into higher energy inflation in March. However, as we noted in our March Forecast Update, we don’t expect the Bank of Canada to rush to respond, until gaining more clarity on the scope, duration, and growth-inflation trade-off of the current shock. 

At this week’s meeting, we expect the BoC to recognize growing external uncertainty but continue to hold the overnight rate at its current, borderline accommodative level of 2.25%. 

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The details:

• Food inflation in Canada slowed from 7.3% in January to 5.4% in February, with the impact of the temporary GST/HST tax holiday a year ago—which biased prices lower then and pushed restaurant CPI above 12% in January—partially unwinding.

• The distortion to food inflation should fully normalize in March as the tax break ended midway through February.

• Energy CPI rose slightly but remained well below 0% (-9.3%) in February due to distortions tied to the removal of the consumer carbon tax last April, which will only disappear in May.

• The Bank of Canada’s core trim and median CPI measures posted a fourth consecutive month of very modest month-over-month (seasonally adjusted) gains, averaging 0.1% in February. The soft readings in recent months were driven by persistent easing in shelter inflation as rent and owned accommodation CPI both moderated.

• Rent CPI fell below 4% in February (3.9%) for the first time in four years. Among owned accommodation components, the year-over-year growth in mortgage interest cost eased to 0.7% as the renewal headwind from higher rates in 2023 and 2024 continues to unwind.

• Overall, shelter inflation stood at 1.5% in February, the lowest reading in five years.

• Further stripping out goods and shelter components from CPI trim, the Bank of Canada’s narrow “supercore” measure also eased below 2% on a three-month annualized basis, to 1.6% from 2.5% in January.

• The easing in inflation pressure was broad-based, with about 31% of the consumer basket seeing price growth above a 3% annualized rate between December and February, down from 42% in January.

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About the author

Claire Fan is a Senior Economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.

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