Canada Inflation Slows in February, But Middle East Conflict Fuels Price Concerns | BNN Bloomberg

Canadian inflation cooled to 1.8 per cent in February, a slowdown from January’s 2.3 per cent reading, according to Statistics Canada data released Monday. While the easing provides some temporary relief, economists caution that rising global oil prices, spurred by geopolitical tensions in the Middle East, are poised to reverse much of that progress in the coming months. The report arrives ahead of a Bank of Canada interest rate decision this Wednesday, though market expectations currently favor a hold.

Tax Holiday’s Impact and Underlying Trends

The primary driver behind February’s deceleration was the phasing out of a temporary Goods and Services Tax (GST) / Harmonized Sales Tax (HST) holiday that had removed sales tax from certain household staples and dining expenses. The tax break was in effect for all of January but only half of February, creating a statistical drag on the year-over-year comparison. BMO senior economist Robert Kavcic characterized the effect as “mechanical,” suggesting it doesn’t reflect fundamental shifts in underlying price pressures. As reported by BNN Bloomberg, Kavcic emphasized the importance of geopolitical factors in shaping the future inflation outlook.

the report noted a nascent increase in gasoline prices toward the end of February, foreshadowing the larger price hikes that would follow the escalation of conflict in the Middle East. Iran’s blockade of the Strait of Hormuz, a critical waterway for global oil transport, has significantly disrupted supply and driven up crude prices. TD senior economist Leslie Preston anticipates headline inflation will climb back to around three per cent in the months ahead due to this energy shock.

Food Price Moderation, But Challenges Remain

On a more positive note, food inflation continued its downward trend, moderating to 5.4 per cent in February from 7.3 per cent in January. The end of the tax holiday also impacted restaurant prices, contributing to the overall easing. StatCan reported modest relief in grocery prices as well, with fresh and frozen beef experiencing a notable slowdown in price increases, falling to 13.9 per cent annually from nearly 19 per cent the prior month.

However, Kavcic cautioned that food inflation is likely to remain a concern throughout 2026. A relatively weak Canadian dollar, combined with the ongoing Middle East conflict, will likely sustain upward pressure on grocery costs. Desjardins’ analysis from June 2025 highlighted the interplay of offsetting policy shocks – including the GST/HST holiday and trade disputes – impacting the inflation outlook.

Bank of Canada on Pause, For Now

The Bank of Canada (BoC) will be closely scrutinizing the latest inflation data as it prepares for its interest rate decision on Wednesday. The central bank held its benchmark rate steady at 2.25 per cent in January and signaled satisfaction with the current policy stance. Financial markets overwhelmingly anticipate another hold this week, with odds exceeding 93 per cent, according to LSEG Data & Analytics.

The February inflation report arrives alongside a weaker-than-expected jobs report from Friday, which showed a loss of 84,000 jobs and a rise in the unemployment rate to 6.7 per cent. CIBC senior economist Katherine Judge suggested this labor market slack could help to contain core inflation, even as energy prices rise. The report also indicated easing trends in the BoC’s preferred core measures of inflation, which exclude volatile items like energy and food.

Core Inflation and the Geopolitical Impact

Preston believes the Middle East conflict will have a limited impact on these core measures, keeping them near the BoC’s two per cent target for much of 2026. While the BoC is expected to remain on hold this week, economists will be listening closely for signals regarding how the central bank is assessing the impact of the oil shock on the broader economy.

Kavcic anticipates the BoC will largely look past the temporary effects of the conflict. However, if higher prices and related disruptions significantly slow economic growth, the central bank might consider lowering interest rates later in the year. He emphasized that Canada is entering this period of uncertainty from a relatively strong position, with inflation already trending downward before the geopolitical events unfolded. “The good news is that before all this started, we were actually moving into a extremely good spot on inflation,” Kavcic said.

What’s Next: Monitoring Energy Prices and the Bank of Canada

The immediate focus will be on monitoring the evolution of the situation in the Middle East and its impact on global oil prices. The duration and severity of the Strait of Hormuz blockade will be critical factors. Beyond that, the Bank of Canada’s next policy moves will depend on a complex interplay of factors, including inflation data, labor market conditions, and the overall health of the Canadian economy. The central bank will need to carefully balance the risk of allowing inflation to re-accelerate against the risk of stifling economic growth with overly restrictive monetary policy. Randall Bartlett of Desjardins discussed these dynamics in a recent BNN Bloomberg interview, highlighting the challenges of navigating a volatile global landscape.

Further data releases, including upcoming retail sales figures and business confidence surveys, will provide additional insights into the state of the Canadian economy and inform the BoC’s decision-making process. The next scheduled interest rate announcement is June 4, 2026.