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Annual pace of inflation cools to 2.2% in February

Inflation rate falls from 2.4% in January on moderate gasoline prices
3/19/2020

The annual pace of inflation slowed in February, and economists suggested the pace would cool even further this year as the COVID-19 pandemic takes its toll on the economy.

The consumer price index in February rose 2.2% compared with a year ago, Statistics Canada said Wednesday.

The increase comes after a year-over-year increase of 2.4% in January.

"Of course, this is the 'before' picture, and based on the plunge in oil prices alone, headline inflation is poised to drop well below 2% as soon as next month's report," Bank of Montreal chief economist Douglas Porter wrote in a report.

"Given that gasoline prices are on track to drop by more than 15% in March alone from last month sets the stage for a rapid pullback in inflation. Simply, it will be a long time before we are again even talking about inflation getting back up to the Bank of Canada's target (of 2%)."

Economists had expected a reading of 2.1% for February, according to a poll by financial markets data firm Refinitiv.

The Bank of Canada, which aims to keep inflation within a target range of 1% to 3%, has cut its key interest rate target twice in recent weeks in an effort to boost the economy in the face of the spread of the novel coronavirus and a plunge in oil prices.

The central bank's key interest rate, which the large banks look to when setting their prime rates, now sits at 0.75%.

"Canadian inflation trends were essentially right on target just before the virus intruded," Porter said.

"This will almost certainly be the last time we will see 2% inflation for an extended period of time. In that environment, the Bank of Canada has a free hand to do what it takes to support the economy."

Statistics Canada said prices rose on a year-over-year basis in seven of the eight major components it tracks, with transportation and shelter prices contributing the most to the overall increase.

Transportation rose 4.4% compared with a year ago, while shelter prices climbed 2.3%.

Prices for household operations, furnishings and equipment edged down 0.2%, the category's fifth consecutive month lower, largely due to lower prices for telephone services and household durable goods.

Excluding gasoline, the annual pace of inflation for February came in at 2%, matching the increase in December and in January.

Royce Mendes, a senior economist at CIBC, wrote in a note to clients that lower oil prices will weigh on prices in March, but added that other categories including, but not limited to airfares, hotels, restaurants and clothing stores are also likely to weaken as the effects of COVID-19 show up more clearly.

"While there will be a slight offset from a weaker Canadian dollar, that won't have any impact on the thinking at the Bank of Canada, unless trading in the currency becomes disorderly," Mendes said.

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