By Robb M. Stewart
OTTAWA--Inflation in Canada eased off in February to a nine-month low and fell back below the Bank of Canada's target, a break for consumer wallets ahead of a likely acceleration as the conflict in the Middle East lifts energy costs and clouds the outlook.
The consumer-price index rose 1.8% from a year earlier, the national statistics agency said Monday. That was a tick slower than the 1.9% inflation economists had expected after the pace dipped to 2.3% the month before.
The positive inflation report is the last major indicator to land before the Bank of Canada's governing council decides Wednesday on interest rates, having twice now left them on hold.
A pullback in core inflationary pressures last month, alongside signs the labor market took a step backward and the economy is struggling, might otherwise suggest policymakers would consider lowering rates, if it wasn't for the war in Iran. Prices at the pump have already risen and economists anticipate inflationary pressures from a jump in crude oil will build. That push-and-pull is widely expected to keep the central bank on hold as officials monitor the fallout from the war.
"February is the dip before the spike. There are some encouraging details in the inflation data, with broad-based price pressures easing, particularly in services and in core measures that look past the distortions from last year's [sales tax] break, but the picture will not stay this calm for long," said Andrew DiCapua, principal economist at the Canadian Chamber of Commerce.
February's data was distorted by comparisons with a year earlier, when a two-month federal tax holiday on some purchases came to end and meant Canadians were paying more for items including restaurant meals, alcoholic drinks and toys.
Still, inflation excluding the effect of indirect taxes has decelerated each month this year, slowing to 1.9% last month from 2.5% at the end of 2025.
While headline inflation has been inside the 1%-to-3% window the central bank seeks to maintain for the last two years, February was the first time below its 2% target since last August.
Core measures also softened, with traditional underlying inflation excluding volatile food and energy costs easing to 2% from January's 2.4%. And the trimmed mean and weighted median measures of core inflation preferred by the Bank of Canada averaged 2.3% annually, compared with 2.45% at the start of the year, which is tracking below the 2.5% the central bank has projected for the first quarter.
"The 'before' picture of Canadian inflation ahead of the oil price shock should give the Bank of Canada some comfort, as it looked tame overall," said Katherine Judge, senior economist at CIBC Capital Markets.
Gasoline prices were up in February but still about 14% below year-earlier levels, and shelter inflation continued to ease. Rent inflation remains elevated at 3.9%, but has slowed sharply from a peak of roughly 9% in 2024. And grocery prices also continued to outpace broader inflation but have decelerated, rising 4.1% for the latest month after a 4.8% increase in January. Cellular services were up 1.5% annually in February, slower than the 4.9% rise seen in January, as lower-priced plans from a number of wireless service providers led to a drop in month-over-month cell costs.
The surge in energy costs as the Iran war enters its third week, combined with year-ago comparisons after Ottawa dropped the consumer portion of a carbon-price levy, are expected to buoy Canadian inflation in the coming months. Michael Davenport, senior economist at Oxford Economics, estimates that if Brent crude oil remains near US$100 a barrel for the next two months then headline inflation likely will rise above 3% in the coming months as consumers continue to face increased prices at the pump and associated increases in transport and food costs. Yet he expects the central bank will look through a temporary acceleration in inflation and will leave its policy interest rate steady for all of 2026.
"Meaningful pass-through from higher global energy prices to core CPI is unlikely given excess slack in the Canadian economy, but that is an upside risk the longer the war drags on," Davenport said.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
03-16-26 1058ET
