Canada’s Inflation Accelerates to 2.6% Amid Sales Tax Holiday End

Inflation in Canada has surged at the fastest rate in eight months, following the expiration of a sales tax holiday that had helped keep food and general merchandise prices in check. The consumer price index rose by an annual rate of 2.6% last month, marking the highest level since June and up from 1.9% in January, according to Statistics Canada on Tuesday (March 18, 2025). On a monthly basis, the index jumped 1.1% in February, the quickest pace in nearly three years. Both figures surpassed economists’ expectations in a Bloomberg survey. Although a second consecutive acceleration in the overall rate is expected, the pace of price increases may still surprise Bank of Canada policymakers, who cut interest rates for the seventh straight meeting last week amid Donald Trump’s tariff threats affecting business and consumer spending. Excluding the federal sales tax relief, Canadian inflation would have soared even higher to 3% in February, precisely at the upper limit of the bank’s target range, from 2.7% a month earlier. Core inflation measures preferred by the central bank also accelerated to 2.9% annually, up from 2.7% in January. The three-month moving averages of these data slightly increased to 3.3%, from 3.2% previously. Despite this, tariffs remain the biggest factor influencing future interest rates. Trump has already imposed tariffs on a wide range of Canadian products, including steel and aluminum, prompting retaliatory measures from Canada. With more U.S. tariffs and Canadian countermeasures expected next month, policymakers must balance downward inflation pressures from a weaker economy with upward pressures from higher costs. Bank of Canada Governor Tiff Macklem stated last week that the bank would ‘proceed cautiously’ amid the tariff war. Economists continue to await clarity on tariffs before firming up expectations for the next monetary policy decision on April 16, when policymakers will also update their forecasts. The sales tax relief on various items, which constitute 10% of the consumer price basket, ended on February 15, exerting upward pressure on the cost of food, general merchandise, and alcohol. Restaurant food prices contributed more to February’s acceleration, with a slower decline of 1.4% compared to a 5.1% drop in January. Regionally, prices increased faster in all ten provinces compared to the previous month, with New Brunswick and Ontario seeing the most significant acceleration.