National Bank of Canada (NBC) economists Matthieu Arseneau and Alexandra Ducharme say Canada’s latest CPI print shows inflation under control before the recent rise in Oil prices. Headline and core measures are both below 2.0%, with shelter inflation moderating. They expect inflation to move toward 3.0% as higher Oil prices pass through, but see core inflation relatively insulated, giving the Bank of Canada (BoC) some policy flexibility.

Inflation soft as Oil shock looms

"This morning’s CPI release is already somewhat outdated, given how much the outlook has shifted following the conflict in the Middle East."

"Inflation was lower than economists had expected at 1.8%, a significant drop from the 2.3% recorded in January, due to changes in indirect taxes from a year ago."

"That said, when indirect taxes are excluded, inflation in Canada is also mild at 1.9%, falling below the 2.0% threshold in February for the first time in 15 months. It turns out that shelter, the index’s heavyweight component, continues to moderate and now stands at just 1.5%, below its pre-pandemic average (2.2%,1999-2019)"

"Meanwhile, the core inflation measures favored by the Bank of Canada are rising at an even slower pace, averaging 1.0%, a sign that price moderation across the country is widespread across components."

"Looking ahead, we expect inflation to move toward the upper end (3.0%) of the BoC’s target range in the coming months as higher oil prices feed through the economy. That said, assuming some degree of de-escalation in the near term, core inflation should remain relatively insulated from these dynamics in the short term."

"This could give the BoC some latitude to look through the rise in headline inflation, particularly since underlying price pressures appeared well contained prior to the conflict in a context where the economy is in oversupply, weakened by uncertainty over tariffs."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)