Canada CPI Preview: Forecasts from five major banks, inflation likely increased in February

We look for headline CPI to push back above the target range to 3.1% YoY in February after last month's deceleration, reflecting the contributions of higher energy prices, a mild rebound in core goods, and persistence across shelter components, as stagnant core inflation measures suggest little progress on underlying inflation ahead of the April BoC decision.

Both headline and core (ex-food and energy) inflation are expected to come in at 3.1% YoY with headline up from 2.9% in January on higher energy inflation. Gasoline prices rose by nearly 4% in February from a month ago. Still, a very soft economic backdrop means that price pressures in Canada are more likely to keep easing and narrowing, allowing for a first rate cut from the BoC to also come in June.

The increase in gasoline prices during the month may translate into a 0.4% gain for the headline index before seasonal adjustment, which could make the 12-month rate increase from 2.9% to 3.1%. Similarly to the headline print, the core measures preferred by the Bank of Canada could strengthen, with CPI-med likely moving from 3.3% to 3.4%, and CPI-trim from 3.4% to 3.5%.

After a surprisingly soft reading of a flat headline CPI in January, we expect a solid bounce-back of 0.6% MoM in February. Part of this strength would reflect usual seasonal patterns where prices rise in the early months of the year. The most important element of monthly CPI reports will continue to be the core inflation measures, CPI-trim and CPI-median, and specifically the average annualized three-month pace of the core measures. Given somewhat stronger February data and a strong increase in December that will still be included in the three-month calculation, three-month core inflation will likely remain close to 3% in February. With February CPI the last release before the BoC’s April meeting, a cut at that meeting remains very unlikely.

Higher prices at the pump in February likely helped push headline CPI up a tick to 3.0% YoY, reflecting a 0.6% NSA monthly increase. That would also include an acceleration in ex. food/energy prices to 0.3% MoM SA, as some volatile segments that showed large declines in January (clothing, airfares) could have seen a turnaround in February, adding to increases in shelter prices. Looking beyond the volatility, however, price increases likely weren’t any more broad based, reflecting soft consumer demand, and we therefore expect 12-month CPI trim and median to both be unchanged.