Canada Inflation Falls to 2.8% in February as Price Growth Eases

Canada’s annual inflation rate unexpectedly fell to 2.8% in February, driven largely by steep declines in wireless and internet service prices and by a slowdown in grocery price growth. The February consumer price index from Statistics Canada, released Tuesday, shows inflation softened for a second consecutive month.

Economists had widely expected the inflation rate to tick up from January’s 2.9%, in part because gasoline prices had climbed. Instead, the drop to 2.8% reflects notable year-over-year declines in key services: Statistics Canada reported wireless service prices were down 26.5% and internet prices fell 13.2%. Those large decreases in communications costs offset some of the other price pressures in the economy.

Food purchased at stores rose 2.4% in February compared with a year earlier, marking the first time since October 2021 that grocery inflation has increased more slowly than the overall consumer price index. That slowdown in food price growth is welcome, but it remains only partial relief; the agency points out that grocery prices are still substantially higher than they were a few years ago, with an increase of 21.6% between February 2021 and February 2024.

Housing-related costs continue to be a major source of inflationary pressure. Mortgage interest costs were up 26.3% year over year, and rents rose 8.2% annually. Those housing components contribute strongly to headline inflation and help explain why overall price growth, while easing, has not returned to the Bank of Canada’s long-run goal.

The Bank of Canada has been looking for clear, sustained evidence that inflation is moving back to its 2% target before it starts to lower its key policy rate. Tuesday’s CPI report is encouraging from that standpoint: core measures of inflation, which remove short-term volatility from the data to give a clearer view of underlying trends, also moved lower in February. These core gauges are watched closely by policymakers because they are designed to reveal more persistent inflation pressures than headline numbers alone.

Financial markets and many economists have been anticipating that the Bank of Canada could begin cutting interest rates later in the year if the easing in inflation continues. A sustained downtrend in both headline and core inflation would strengthen the central bank’s case for reducing borrowing costs, which could affect mortgage rates, lending conditions and household finances across Canada.

For Canadian households, the mixed picture means pockets of relief alongside ongoing challenges. Lower prices for wireless and internet services should reduce monthly bills for many consumers, while the slowdown in grocery inflation helps ease one of the biggest day-to-day cost burdens. At the same time, elevated mortgage interest costs and higher rents continue to press on household budgets, especially for borrowers with variable-rate debt or those seeking rental housing.

Looking ahead, the path of inflation will depend on the balance between easing price pressures in several categories and continued strength in housing-related costs. Policymakers will be watching upcoming CPI releases and core measures closely to determine whether the improvement seen in recent months represents a durable trend. If the softer readings persist, they would increase the likelihood of policy rate reductions that could gradually lower borrowing costs for consumers and businesses.

Overall, the February CPI report signals a notable moderation in price growth, led by sharp declines in communications service prices and a slower rise in grocery costs. However, significant increases in mortgage interest and rent mean many Canadians will still feel elevated living costs compared with a few years ago. The Bank of Canada’s next moves will hinge on whether this moderation becomes sustained and broad-based across the economy.

Read more about inflation: