Canada’s Inflation Rate unexpected Leaps Sharply to 8-month High 2.6% as Sales Tax Break Ends and Tariff bite still looms… Explosive Inflation (and anticipated recession) may force Bank of Canada to Pause Rate Cuts

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.

Canada’s annual inflation rate leaps to 2.6%, complicating path for BoC as tariff bite still looms

Spike in core measures “isn’t good news as this doesn’t yet reflect the impact of tariffs,” CIBC economist says

The CPI data come less than a week after the Bank of Canada further cut its overnight rate, noting in its statement that it “will be closely monitoring inflation expectations.”

Canada’s inflation blows past expectations coming in at 2.6 yoy versus expected 2.2

Canada’s annual inflation rate jumped to 2.6 per cent in February, according to the latest data from Statistics Canada, sharply exceeding analysts’ expectations and adding to the challenges faced by the Bank of Canada (BoC).

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 were also well ahead of the consensus among economists polled by Reuters, which called for 2.2 per cent inflation in the month.

The pronounced rise in inflation comes before a projected spike caused by U.S. tariffs and Canadian countermeasures. The BoC must also factor in weakened economic growth expected as a consequence of the trade war.

Tuesday’s data “put the BoC in a difficult place,” TD Bank economist Leslie Preston said in a note, writing that “Canadians’ inflation expectations have risen” even as tariffs and related uncertainty are slowing demand.

Analysts had expected a rise in February’s inflation figures due to the end of a temporary tax break on GST and HST on some goods, but the increase in prices came in steeper than an analyst consensus of 2.2 per cent, as reported by Reuters.

‘Simply too hot’

Statistics Canada’s core measures of inflation, CPI-trim and CPI-median — which strip out tax impacts and which are closely watched by the BoC— each jumped 2.9 per cent from a year ago, a faster rate of increase than the 2.7 per cent seen in January.

“Overall, the unexpected pickup in core measures isn’t good news as this doesn’t yet reflect the impact of tariffs, which will see headline CPI exceed 3 per cent year-over-year in the coming months,” CIBC economist Katherine Judge said in a note.

The core measures “are simply too hot and have been too hot in a long stretch back to last May,” Scotiabank economist Derek Holt wrote. That longer-term trend, Holt argues, raises questions about “why the BoC—an inflation-targeting central bank—has been in such a rush to cut to 2.75 per cent for 275 basis points of easing to date.”

On a monthly basis, the Consumer Price Index (CPI) rose 1.1 per cent in February, while on a seasonally adjusted monthly basis, the CPI rose 0.7 per cent. February’s rise came after the CPI inched up to 1.9 per cent in January.

Inflation’s surprise jump could push Bank of Canada to pause rate cuts

A surprise jump in inflation and a flood of “noise” in the economy may push the Bank of Canada to pause its interest rate cuts next month, some economists argue.

The complexity of the situation for the central bank is reflected in the market’s uncertain expectations for the next rate announcement. Currency swaps put odds of a pause on interest rate cuts at 59 per cent, according to Reuters, while economists’ forecasts are mixed.

TD now expects the BoC “to provide some further cushion” with two more consecutive 25-basis-point cuts, Preston says, while noting that “how tariffs play out remains highly uncertain.” Given the latest data, write National Bank of Canada economists Matthieu Arseneau and Kyle Dahms, “there is a strong chance that the rate cut we were expecting in April will not materialize unless the economy deteriorates very rapidly in a context of tariff uncertainty.”

Royce Mendes, economist at Desjardins Group, says the BoC should now “take a hawkish detour.”

“Given the tariff-related rise in inflation expectations and the recent momentum in actual price growth, it now seems likely that the Bank of Canada will pause its rate cutting cycle in April, at least temporarily,” Mendes wrote.

BMO’s Benjamin Reitzes also expects a pause, though he points out several “complicating” factors for the central bank. “Note that the coming end of the carbon tax will pull inflation down sharply in April, but March could see more upside as the rest of the tax holiday impact reverses,” he writes.

In a preview note, economists at RBC had predicted a 2.5 per cent increase, pointing to the end of prices “mechanically depressed” by the GST/HST break. In a report accompanying today’s data, Statistics Canada says the end of the tax break “contributed notable upward pressure to prices for eligible products” — which it says represent around 10 per cent of items in the CPI basket.

Slower price growth for gasoline versus January helped keep the headline inflation from rising higher, the report says.

The CPI data come less than a week after the BoC cut its overnight rate a further 25 basis points.

Economists noted a more hawkish tone from BoC governor Tiff Macklem around inflation, with the U.S.–Canada trade war expected to put upward pressure on prices even as it weakens the Canadian economy.

A new OECD report models a 1.1-percentage-point spike in inflation in Canada in 2025 should a broad tariff and counter-tariff situation persist.

Financial markets were pricing in a roughly 62 per cent chance the Bank of Canada holds its benchmark rate steady at its next decision after the release of February’s inflation data, according to LSEG Data & Analytics.

RSM Canada economist Tu Nguyen also said fears that inflation could reignite and unwind the progress made to date in taming price pressures could see the Bank of Canada lean toward a hold, depending on what developments unfold on the tariff front in the coming month.

“February inflation … is going to give them second thoughts about reducing the rate again in April, we might see the bank choosing to pause at that meeting,” she said.

Here’s why Canada’s inflation rate has soared to 2.6 per cent

Inflation rate jumps to 2.6% in February as tax break ends

In 1923 Germany, inflation made German marks so useless that it came to a point where burning wads of cash was cheaper than buying fire wood