News & Analysis

Today’s data showed that inflation in Canada continued to tick upwards in February by all counts. Headline inflation rose from 5.1% YoY to 5.7%, largely due to price rises in transportation, shelter and food. At 5.7%, price gains were the largest since August 1991, when headline CPI recorded 6%. In monthly terms, inflation rose by 1.0% on a non-seasonally adjusted basis, outstripping expectations by 0.1 percentage points.

Despite much of the inflation push coming from higher gasoline prices (+32.3%), food prices (+7.4%) and the cost of shelter (6.6%), inflation pressures remained broad-based. On the surface, this is visible within the Bank of Canada’s three preferred core metrics; core-common, core-median and core-trim, all of which strip out volatile components within the headline measure to varying degrees. On an annual basis, all three measures rose from January, with two of the three beating expectations—only core-median met expectations at 3.5%. Meanwhile, simply stripping out gasoline prices from headline inflation still left the rate at multi-decade highs of 4.7% in February.

In combination with Friday’s impressive jobs report, the macroeconomic backdrop should remain supportive of successive rate increases in Canada, as has been our base case for some time. Friday’s data showed that wages grew 3.1% over the last year, which suggests that a wage-price spiral is starting to form. Increasing evidence that inflation is not just a global problem caused by supply chains and Covid-19 effects, but that domestic factors are increasingly playing a role will add to the Bank of Canada’s sense of urgency. While the Bank could reasonably argue that there’s nothing it can do to resolve a global problem, strong domestic inflation will compel it to act.

With the Federal Reserve set to announce their latest policy decision this afternoon, and with multiple scenarios on the table for the US central bank to deliver a “hawkish” or “dovish” surprise, today’s data should increase the loonie’s resistance to any such release. This has initially become visible in the USDCAD reaction after the release of the data as the pair dropped below the 1.27 handle despite the event risk on the horizon.

Beneath the surface, this data release revealed yet another broad increase in price pressures, with 71.7% of components exceeding a 2% YoY gain. Since 2000, that figure has averaged 48.9%. More worryingly, the proportion of prices rising in excess of 10% YoY was 11.6%, almost 4 times the historical mean. Looking at the major contributors (gasoline, groceries and shelter), the second round effects of the spike in WTI due to the war in Ukraine are already starting to show. Grocery prices, for example, rose 7.4% YoY, up from January’s reading of 6.5%. The largest annual price increase in purchased food since May 2009 is largely due to higher input costs and transportation costs, which will only be further exacerbated in March given the widely discussed supply issues in global commodities. Gasoline’s rise of 32.3% is alarming given the further pressures on prices at the pump in early March. With such a dramatic increase, gasoline prices are likely to destroy demand.

Nevertheless, the recent decline in international energy prices may help limit the continued surge in energy inflation in March.

In contrast to food and energy costs, which are subject to international developments, the 6.6% YoY rise in shelter costs is more concerning. At the fastest pace since August 1983, the rise in shelter costs, and rent prices (+4.2%) due to improved economic and demographic conditions, will sound the alarm bells for those at the BoC to raise borrowing costs.


Out of 66 CPI components, over 11.6% of them are now printing above 10% YoY, the largest proportion of the basket since March 2003


Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst


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