Canada's inflation shoots up to 2.6% as sales tax break ends

Promit Mukherjee

Tue, Mar 18, 2025, 5:34 AM 2 min read

By Promit Mukherjee

OTTAWA (Reuters) - Canada's annual inflation rate showed a surprise jump to 2.6% in February, surpassing expectations as a sales tax break that ended in the middle of last month pushed prices higher amid an already broad-based increase, data showed on Tuesday.

This is the first time in seven months that the rate of increase of consumer prices has crossed the 2% mark, the mid-point of the Bank of Canada's target range of 1% to 3%. In January, inflation was at 1.9%.

Without the tax break, inflation in February would have been 3%, Statistics Canada said.

The inflation number expanded currency market bets for a pause in the interest-rate-cutting cycle next month to over 70% from 59% before the numbers were released.

The Canadian dollar firmed after the data and was trading up 0.06% at 1.4283 to the U.S. dollar, or 70.01 U.S. cents. Yields on the two-year government bond surged by 5.7 basis points to 2.596%.

On a month-on-month basis, prices rose by 1.1% in February from 0.1% the prior month, Statscan said.

Analysts polled by Reuters had forecast the yearly inflation at 2.2% and 0.6% on a monthly basis in February. The BoC had said last week that it expected inflation to reach 2.5% in March amid price pressures due to tariff-related uncertainty.

While prices increased across almost the entire CPI basket, the major jump was in food purchased at restaurants, some clothing items and alcohol after the tax reprieve was lifted.

"Restaurant food prices contributed the most to the acceleration in the all-items CPI in February," Statscan said.

Food prices increased 1.3% year over year while clothing and footwear increased by 1.4% on a yearly basis. Other items that added to price pressures in the CPI basket were transportation, which jumped by 3%, and shelter costs, which were up 4.2%.

Economists have said that the sales tax break had distorted overall inflation numbers, and that core inflation was a more accurate gauge of consumer price trends.

The BoC has two preferred measures of core inflation: CPI-median and CPI-trim.

CPI-median, or the centermost component of the CPI basket when arranged in an order of increasing prices, rose to 2.9% in February. CPI-trim, which excludes the most extreme price changes, was also up to 2.9%. Both were at 2.7% in January.

(Reporting by Promit Mukherjee; Editing by Dale Smith and Mark Porter)