Business

Inflation rate cools to 2% in February

Canada's inflation rate was two per cent in February, a slight cooldown from January's level.

But gas prices rise by 23% as higher oil prices bite

On a year-over-year basis, consumers paid 23.1 per cent more for gasoline in February. (Associated Press)

Canada's inflation rate was two per cent on an annual basis in February, a slight cooldown from January's level.

The annual increase in the cost of living was largely fuelled by gas prices. Consumers paid 23.1 per cent more for gasoline in February, compared to the same month last year.

Gasoline prices also showed an increase in January's inflation report, which Statistics Canada attributed to higher oil prices and the impact of new carbon taxes in Alberta.

If the impact of gas prices is stripped out, said Statistics Canada, the inflation rate was 1.3 per cent in the year to February. That's still slightly less than January's 1.5 per cent pace when gas is excluded.

"In other words," wrote Scotiabank economist Derek Holt in a note to clients, "after removing what you pay to fill your gas tanks, there is scant evidence of inflationary pressures in Canada."

Food prices drop

The increase in gasoline prices was partly offset by an annual decline in food prices. Canadian consumers paid 2.3 per cent less for food in February 2017, compared to a year before.

A 14 per cent annual decrease in the price of fresh vegetables "contributed the most to the decrease," said Statistics Canada.  Prices of fresh fruit were down 13.3 per cent on an annual basis.

"The year-over-year declines in the fresh vegetables and the fresh fruit indexes partly reflect a spike in their prices last winter," said Statistics Canada.

That 2016 spike in the price of produce was due to a weak Canadian dollar, which drove up the cost of imported food. A drought in California also increased the prices of some produce last year.

Only one province, Manitoba, saw its annual inflation rate heat up, from 2.1 to 2.3 per cent. In Ontario and British Columbia, the pace stayed the same, at 2.3 per cent.

Inflation rates ticked lower in all other provinces.

Impact on interest rates

The Bank of Canada recently changed the way it measures core inflation, which removes volatile items that can lead to big monthly swings, and now uses three core inflation measures. The Bank of Canada watches core inflation closely in deciding its course on interest rates.

The average of the Bank of Canada's three core inflation measures in February was 1.6 per cent annualized.

"Soft core inflation is just one additional reason for a fairly dovish BoC outlook and for betting against rate hike pricing," wrote Scotiabank's Derek Holt.

TD economist James Marple agreed, writing that "investors may be over pricing the chance of a rate hike."

"Consistent with gradual absorption of economic slack, we do not expect the central bank to step off the sidelines until well into 2018," wrote Marple.