Annual inflation rate jumps with tax holiday end:

Annual inflation surges as tax holiday ends: StatCan's report highlights implications for economic policy.

Canada's annual inflation [
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} 2.6% in February after the federal government's temporary tax holiday concluded mid-month, according to data released by Statistics Canada on Tuesday. This represents a notable increase from January's 1.9%, a period when the GST and HST were removed from a range of household staples, gifts, and restaurant expenses.

The February figure exceeded economist predictions, with a Reuters poll projecting inflation at 2.2% for the month. StatCan's consumer price index factors in final prices paid by Canadians, including applicable taxes, underscoring the immediate effect of reintroducing sales taxes. Without the tax break for half of February, StatCan estimated that inflation would have reached 3%.

During the first half of February, the tax holiday kept restaurant food prices 1.4% lower year-over-year. However, the reinstated sales tax mid-month led to higher dining costs, which contributed significantly to the overall rise in the price index. Other items such as alcoholic beverages, children's clothing, and toys also saw smaller price reductions compared to January as the tax break tapered off.

Inflation accelerated across all provinces, with Ontario and New Brunswick experiencing the steepest increases. Gasoline prices nudged up 0.6% from January to February, but annual comparisons showed slower growth, which helped temper the broader inflation surge. Meanwhile, Canadians faced steep 18.8% year-over-year increases in travel tour costs, driven partly by a spike in cross-border travel to the U.S. during February's long weekend.

Core inflation metrics favored by the Bank of Canada came in hotter than anticipated and show signs of further growth in upcoming months, TD Bank senior economist Leslie Preston noted. The February figures, however, do not account for tariffs and counter-tariffs arising from U.S.-Canada trade conflicts, which commenced in March and are expected to push prices higher in subsequent reports.

Despite anticipated price hikes from trade tensions, Ottawa's decision to revoke the consumer carbon price starting April 1 will provide some relief in next month's inflation data. Benjamin Reitzes, BMO's managing director of Canadian rates and macro strategy, cautioned that March's inflation data is also likely to rise as the effects of the tax holiday fade completely. He emphasized that ongoing uncertainty complicates the Bank of Canada's approach to managing its benchmark rate.

The central bank reduced its key interest rate by 0.25 percentage points to 2.75% last week, signaling a cautious approach amid economic uncertainties. The next interest rate decision is scheduled for April 16. Reitzes suggested that unless economic conditions worsen significantly, the Bank of Canada might consider pausing its current cycle of rate cuts after seven consecutive reductions.

TD Bank forecasts two additional quarter-point rate cuts at the Bank of Canada's forthcoming meetings if U.S. tariffs persist for six months before easing. This sentiment underscores the challenging balancing act facing Canadian policymakers as external factors and domestic inflationary pressures converge.

Soure@
Bloomberg