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Canadian February CPI falls to 2.8%

It’s another battle won amid the Bank of Canada inflation war – the February Consumer Price Index (CPI) report released this morning by Statistics Canada reveals the latest headline number is 2.8%, down from 2.9% in January, and rising just 0.3% month over month. That’s the CPI’s slowest growth pace since June, and also well below expectations; analysts had braced for an inflation uptick of 3.1%. That’s good news for cash-strapped consumers – not to mention music to the Bank of Canada’s ears.

Price declines for food costs, internet, and cellular services, helped pull the headline number down. However, the sticky items that have contributed most to inflation’s growth remain high. Gas prices were on the rise again, up 0.8% in February following January’s -4% decline.

High mortgage rates continue to prop inflation up

Mortgage interest costs – which have increased 26.3% annually, continue to be the largest contributor to CPI growth. Stripping them out of the measure actually lowers the headline to 1.9% says StatCan – below the Bank of Canada’s target 2% threshold for rate cuts. Ballooning rent costs also continue to prop up inflation growth, coming in at 8.2% higher.

Grocery price growth also continued to ease, coming in at 2.4% in February compared to 3.4% in January. According to StatCan, this was the first month since October 2021 that the grocery measure grew at a slower pace than the overall headline number. However, the agency points out that this is partially due to the fact that in February 2023, there were considerable supply constraints left over from the pandemic, as well as bad weather in growing regions, which put upward pressure on food costs. From a big picture perspective, overall grocery costs have increased 21.6% as of February 2021.

What the February CPI means for the Bank of Canada

In addition to a softer headline number, the core median and trim inflation numbers – two metrics closely monitored by the Bank of Canada – also fell, with median down to 3.1% from 3.3% last month and trim to 3.2% from 3.4%. This will further bolster the rationale for the BoC to cut rates later this year, and firmly places its hiking cycle in the rearview. The three-month annualized basis showed combined, they rose 2.2%, their slowest rate of growth since January 2021.

“It's difficult to poke any holes in this report,” writes Doug Porter, BMO’s Chief Economist and Managing Director of Economics. “We're not the only analysts caught by surprise at how modest these inflation rates of the past two months have been (and especially in contrast to the high-side and sticky readings in the U.S.).”

He adds that inflation is now on track to average 2.8% growth for the first quarter of the year, below the BoC’s own projected 3.2%.

“That's a big and welcome difference, but is it sustained enough for rate cuts? April still seems too early to be pulling the trigger on rate cuts, though it can't be entirely ruled out if the Business Outlook Survey shows even more progress.”

BMO’s official call for cuts remains June, Porter says, as the February report “certainly reinforces our conviction.”

The impact of February CPI on mortgage rates

While variable mortgage rates won’t see any downward movement until the BoC actually cuts rates, the fixed mortgage rate market could see some slight discounting as a result of today’s promising report.

Bond yields slid in reaction to the news. As of publishing, the two-year government of Canada bond yield – considered the most likely predictor of BoC behaviour – is down to 4.1%, a drop of 15 basis points since this morning’s open. The five-year government yield, which lenders use to price their fixed mortgage rates, has tumbled by 11 basis points since open to 3.5%, after lingering in the 3.6% range for the last week. That’s not enough to put downward pressure on fixed rates just yet, but discounts could be coming if the trend persists.

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In all, the February CPI report shows clear progress is being made on lowering inflation, and paves the way for lower rates to come in the second half of 2024. All eyes will be on the BoC’s next announcement on April 10 to gauge its level of optimism –  and, of course, any hints as to when those cuts may actually occur.

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Penelope Graham, Director of Content

Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.