Grocery prices rose more slowly than overall inflation in February for first time since 2021: StatCan

Canada's inflation figures came in softer than expected for a second consecutive month, suggesting to economists that the Bank of Canada will have ample grounds to begin cut interest rates in the coming months. 

Statistics Canada's consumer price index report Tuesday (March 19) showed the annual inflation rate fell to 2.8% amid sharp declines in cellular and internet services, as well as slower grocery price growth.

Economists were widely expecting Canada’s inflation rate to have risen above the 2.9% rate set in January, in part due to higher gasoline prices.

"This is an unambiguously good report from the Bank of Canada's perspective. It essentially shows that high interest rates are working to tame inflation, which is what they're looking for to start cutting interest rates," Katherine Judge, a director and senior economist and CIBC Capital Markets, said in an interview. 

The federal agency says prices for wireless services were down 26.5% and internet prices fell 13.2% from a year ago.

Prices for food purchased at stores in February were up 2.4% compared with a year earlier, marking the first time prices grocery prices rose more slowly than overall inflation since October 2021.

High interest rates and recovery from supply chain disruptions post-pandemic have helped slow inflation globally. In Canada, price growth has come down significantly from its peak of 8.1%. 

But despite the progress, consumers are still stuck with much higher prices, particularly for groceries. 

Statistics Canada said grocery prices increased 21.6% between February 2021 and February 2024.

Meanwhile, housing costs continue to put upward pressure on inflation, with mortgage interest costs up 26.3% and rent up 8.2% annually.

Still, the report Tuesday is encouraging for the Bank of Canada, which is looking for more evidence that inflation is sustainably headed back to the country’s 2% target before it moves to lower interest rates. 

February marked the second straight month that inflation fell within the Bank of Canada's one to three per cent target range. The central bank’s preferred core measures of inflation, which strip out volatility in prices, also fell last month.

"The core measures are the ones that are really important from the Bank of Canada's perspective, because they exclude things that aren't a good signal of underlying demand," Judge said. 

"What makes it such an unambiguously good report is the fact that the weakness wasn't in these volatile, supply-driven headline items. They were actually beneath the surface."

Judge said the "last piece of the puzzle" for the central bank will be seeing more softness in the labour market and the economy overall. 

The Bank of Canada has held its key interest rate at five per cent since the summer, opting to give monetary policy more time to work its way through the economy and slow demand.

Recent progress on inflation and a slowdown in the Canadian economy has allowed the Bank of Canada to shift its messaging more recently, signalling that its next move is most likely a rate cut. 

But governor Tiff Macklem has also been clear that the central bank doesn't want to move too quickly, only to reverse course later. 

"We’ve come a long way in our fight against high inflation. But it’s still too early to loosen the restrictive policy that has gotten us this far," Macklem told reporters on March 6.

Economists continue to widely expect the Bank of Canada to begin cutting its key interest rate in June or July. 

"Overall, we continue to expect a persistently soft economic backdrop to further slow inflation readings in Canada in the months ahead, allowing for the BoC to start lowering interest rates around mid-year," RBC economist Claire Fan wrote in a report.

The central bank's next interest rate announcement is scheduled for April 10.