Canada CPI for February: good but not great

Canada's headline consumer price index rose 5.2 percent in February from a year ago, a significant slowdown from the 5.9 percent recorded in January, according to data released by Statistics Canada this morning. The month-on-month increase was 0.4 percent (unadjusted), compared to 0.5 percent in January. The sharp fall in the year-on-year rate reflects the continuing impact of the base effect, as the 1.0 percent monthly gain recorded in February 2022 fell out of the calculation. 

Energy prices are now actually lower than they were a year ago, but food prices remain at problematic levels. The 10.6 percent year-on-year gain recorded in February marks the seventh straight double-digit increase in this key component. Excluding food and energy costs, core CPI rose 4.8 percent in the year to February, down from 4.9 percent in January.  

Mortgage interest costs are also rising sharply, as a direct consequence of the Bank of Canada's rate hikes. The yearly increase reached 23.9 percent in February, the fastest pace since 1982 (a time when absolute interest rate levels were massively higher than they are today). Excluding interest costs, CPI rose 4.7 percent in the year to February, down from 4.7 percent in January. 

Although the headline number is comforting for the Bank of Canada -- and for Canadian consumers -- the report is not unalloyed good news. The monthly rates of increase so far in 2023 annualize to a pace well above the Bank's 2 percent target, with the decline in the headline number heavily reliant on the base effect. Fortunately for the Bank, that effect will persist into mid-year, potentially allowing headline CPI to approach 3 percent by the third quarter. The Bank's preferred measures of core inflation are also proving sticky, with the mean of the three indices still above 5 percent.

Even without the uncertainty triggered by the problems in the banking sector, today's numbers would certainly justify the Bank maintaining its "conditional" pause through its next rate setting meeting in April. Beyond that time, if current banking problems translate into tighter lending standards, as seems very probable, then the resulting slowdown in the Canadian and global economies will further reduce the need for any further tightening moves.  We will find out on Wednesday whether Fed Chair Powell agrees, but it is looking very likely that we are at or at least in sight of the end of the tightening cycle.