Annual rate of inflation accelerates sharply to 2.6% in February as tax break ends

The annual rate of inflation accelerated sharply to 2.6 per cent in February as the federal government’s temporary tax break came to an end mid-month, Statistics Canada said Tuesday. 

That marks a sizable jump from the 1.9 per cent increase seen in January, when Canadians saw GST and HST taken off a variety of household staples, common gifts and restaurant bills for the entire month.

February’s figures are well ahead of the consensus among economists polled by Reuters, which called for 2.2 per cent inflation in the month — and some economists believe this increase could lead to a pause in rate cuts from the Bank of Canada.

Statistics Canada’s consumer price index (CPI) is based on final prices paid by Canadians, meaning sales taxes are included in the agency’s calculations.

With the tax holiday still in place until Feb. 15, restaurant food prices were down 1.4 per cent year-over-year. But Statistics Canada noted the reintroduction of the sales tax mid-month meant dining out was contributing the most to the acceleration in the overall price index in February.

Alcoholic beverages, children’s clothing and toys were also included in the tax holiday and saw their costs drop similarly in February, but not as much as in January.

When the tax break was put into effect, it lowered the final price of your bill when getting a meal at a restaurant, turning a $100 bill to around $90, for example — and that shows up as a drop in prices in inflationary terms, explained James Orlando, director of economics at TD Bank.

That also means that when those taxes were reapplied, increasing that final bill price again, it registers as a sudden increase in inflation as well. 

“But what we found today is it’s not just going from like $90-something to $100. It’s going even higher than that,” Orlando said. “There’s something else going on where there’s underlying inflation increasing in this country.”

Statistics Canada calculations show that without the tax break in place for half a month, inflation would have come in at three per cent in February.

February’s increase is a “massive” rise, Benjamin Reitzes, manager director and macro strategist with BMO Capital Markets Economics, said in a note to clients, “lifting inflation to an eight-month high.”

He also observed that the increase wasn’t solely due to the tax impact, noting seasonally adjusted CPI saw an increase of 0.4 per cent even without the mid-month return of GST/HST taken into account. 

“The headline inflation figures are subject to as much noise as we’ve seen in decades and that’s poised to continue for at least another couple of months, making it very challenging to interpret these figures,” he wrote. 

Increases seen in every province

The consumer price index rose in every province last month, with Ontario and New Brunswick facing the fastest accelerations.

While gas prices were up 0.6 per cent from January to February, Statistics Canada said the annual comparison showed a deceleration last month, helping to rein in the overall rise in inflation.

Elsewhere, Canadians were paying 18.8 per cent more year over year on travel tours last month, with Statistics Canada pointing to increased demand in travel to the United States over the Presidents’ Day weekend to explain the price hikes. This marked a 23 per cent increase in travel prices compared to the previous month. 

The Bank of Canada’s preferred metrics of core inflation came in “hotter than expected” in February and are poised to keep rising in the months ahead, TD Bank senior economist Leslie Preston said in a note to clients on Tuesday.

WATCH | Tiff Macklem on what tariffs could mean for inflation: 

Bank of Canada governor Tiff Macklem, who cut the bank’s key interest rate on Wednesday, said the bank expects tariffs to impact inflation in a few ways, including changes to export markets and supply chains, as well as shifting domestic consumption and saving habits.

The February inflation figures do not directly reflect the imposition of tariffs or counter-tariffs between Canada and the U.S., which went into effect after a series of deadlines and announcements in March.

Katherine Judge, an economist with CIBC, warned in a note to clients that CPI could rise past three per cent year over year “in the coming months” as the impact of the tariffs begins to show up in the data. 

Economists split on rate-cut impacts

The CPI report comes just a week after the Bank of Canada cut its key interest rate by a quarter point to 2.75 per cent to help manage inflation, continuing a series of cuts that started in June 2024. The next decision is set for April 16.

Economists are split on whether or not this sharp rise in the consumer price index could trigger a change to this trend.

Preston said that based on a forecast where U.S. tariffs remain in place for six months before abating, TD is calling for a pair of quarter-point cuts at the Bank of Canada’s next two decisions.

Reitzes says he believes that the Bank of Canada could see the CPI report as a sign to take a cautious tone as they seek to mitigate the impact of tariffs. 

“We’ll see what early April brings on the tariff front, but if the economic outlook doesn’t deteriorate further, the BoC will be considering a pause after cutting at seven straight meetings,” he said.

Whether we see a pause in cuts could hang on what happens on April 2, according to Judge — the day that U.S. President Donald Trump has promised another round of tariffs will come into effect.  

“If a 25 [per cent] tariff is avoided, the BoC will likely pause at the April meeting to gauge CPI pressures ahead,” she said.