Economists: Inflation Over 3% Last Month as Gas Prices Rise

Economists say inflation likely picked up again in February, driven in part by higher gasoline prices, underscoring that the path back to the Bank of Canada’s 2% target will remain uneven.

Statistics Canada will publish its consumer price index (CPI) for February on Tuesday. Most forecasters expect a year-over-year increase of about 3.1%, which would reverse some of the improvement seen in January when the annual rate eased to 2.9%.

“We expect inflation to re-accelerate because energy prices rose during the month,” said Royce Mendes, managing director and head of macro strategy at Desjardins. “For the next few months, inflation is likely to hover around the 3% range.”

A renewed uptick in inflation would complicate the outlook for the Bank of Canada, which many analysts expect will begin easing its policy interest rate in the months ahead.

Mendes emphasized that analysts will be watching the underlying measures of inflation closely. Those core indicators strip out volatile items and give a clearer sense of persistent price pressures that determine where inflation is headed.

“The critical question is what’s happening beneath the surface,” Mendes said. Core or underlying measures can signal whether higher headline inflation is temporary or reflective of broader pressures that could require a longer period of tight policy.

What has the Bank of Canada said?

At its most recent interest rate decision earlier this month, Governor Tiff Macklem highlighted that nearly half of the CPI components are rising at an annual pace above 3%. By contrast, in more typical inflationary periods only about a quarter of the CPI components move that quickly. That divergence helps explain the central bank’s cautious stance.

The Bank of Canada has placed strong emphasis on trends across monthly reports rather than any single reading. Macklem has repeatedly warned against cutting rates too soon and has said the bank will wait for clearer evidence that inflation is sustainably returning to the 2% target.

“This would be exhibit A from the bank’s library as to why we have to be cautious,” said Douglas Porter, chief economist at BMO, referring to the combination of elevated components and the uncertain path for core inflation.

The central bank has maintained its key policy rate at 5% since July while it seeks confirmation that inflation is moving decisively toward the 2% goal. Its most recent projection expected inflation to reach that target in 2025, a timeline echoed by many economists.

Porter noted that energy prices add a significant layer of uncertainty to inflation forecasts. Oil and gasoline costs can swing rapidly and make short-term predictions especially volatile.

Tuesday’s CPI release will be the final inflation reading before the Bank of Canada’s April rate decision — a meeting many analysts describe as pivotal in determining whether and how the bank prepares markets for future rate adjustments.

When might interest rates come down?

While the Bank of Canada is not widely expected to change its policy rate at the April meeting, a number of forecasters are anticipating the central bank may begin cutting rates at its June decision. That expectation rests on a sequence of data releases and policy communications over the spring.

“If the bank is going to cut in June, they would have to deliver a fairly heavy signal in the April meeting,” Porter said. He added, however, that nothing is guaranteed: economic conditions can shift quickly over a couple of months, and the bank will be watching incoming data closely.

One notable event between the April and June decisions is the federal budget, which will be presented roughly a week after the April rate announcement. The budget and two additional months of economic data will shape the Bank of Canada’s June deliberations and could influence the timing and scale of any future rate cuts.

Given the uncertainties, analysts expect careful wording from the central bank. Any clear signal about easing policy would likely be measured and conditional on further evidence that inflation is sustainably moving toward the 2% target.

Read more on the economy:

• How the Bank of Canada’s benchmark rate impacts your finances
• I keep hearing interest rates may rise. What would that mean for my mortgage?
• A contrarian approach to inflation, interest rates and the market
• Is Canada in a recession? — and other questions about the economy, answered