Temporary tax breaks on goods and services subtract from inflation, but they also add when the tax comes back on.

Such was the case in February.

The annual inflation rate increased in Canada last month, in large part due to the mechanical effects of the GST/HST holiday ending in mid-February.

The annual inflation rate rose to 2.6% last month, up from 1.9% in January. Restaurant and food prices contributed the most to the acceleration in the overall inflation rate, as people returned to paying the tax.

An acceleration in inflation post-tax holiday was expected. In last week’s rate announcement, the Bank of Canada noted that the end of the GST/HST holiday would drive up the inflation rate to around 2.5%, although the Bank said this would happen in March when the tax was back on for the full month.

What else happened?

It wasn’t just the GST holiday reinstatement. CPI excluding indirect taxes accelerated to 2.9% year-over-year (y/y), up from 2.6% in January. Statistics Canada pointed to an increase in the cost of travel tours (+18.8% y/y) as one contributing factor.

Looking at trend measures, the closely watched core inflation rate ticked up 0.2 percentage points to 2.9% y/y using both the median and trim measure.

The good news? Shelter costs have been a major inflation culprit, but they continue to moderate. The cost of shelter was up 4.2% y/y, the smallest increase since May 2021. With posted rents falling, housing prices flattening and mortgage interest costs continuing to rise at a slower rate, we see further downward pressure on shelter costs.

Implications for the Bank of Canada

This CPI increase came in hotter than expected (even with the tax reinstatement), likely raising eyebrows at the Bank of Canada. Last week, the Bank cut its interest rate for the seventh straight time, and it was clear they are monitoring both downward pressure on inflation (from a softer economy) and upward pressure (from the tariffs). There will be more noise in the upcoming inflation data when the repeal of the carbon tax starts in April, which will lower inflation. The Bank will try to see through all this, and focus on the trend. Over time, assuming long-term inflation expectations remain anchored, we think the Bank will lean more towards recessionary risks (should tariffs remain in place) and cut rates further in 2025. But this hotter-than-expected CPI report makes a cut less likely in April.

Alberta inflation moves higher

Consumer prices rose 2.8% y/y in Alberta, up from 2.5% in January. The GST reinstatement also contributed to the uptick, though not as much as in Ontario and Atlantic Canada where the higher Harmonized Sales Tax was put back in place.

Alberta gasoline price gains (+12.1% y/y) continued to outpace the national average (5.1%). We expect gasoline inflation readings to move more in line with national trends, as temporary effects of the fuel tax pause come off in April.*

Shelter costs rose at a slower rate last month (3.2% y/y), with a slowdown in rent and owned accommodation, and a larger decrease in utility costs.

Our updated base case forecast is that the inflation rate in Alberta will average 2.6% in 2025.

*The province paused the fuel tax in 2023 and much of 2022. This lowered annual inflation in 2022-2023, but raised it when the tax was reinstated in 2024. The tax was partially reinstated in January 2024, and then fully reinstated in April 2024. As such, the tax measure will no longer affect the year-over-year readings starting this April.

Answer to the previous trivia question: Alberta’s merchandise exports to Ireland last year totalled just under $15 million.

Today’s trivia question: On March 18, 1968, the U.S. Congress repealed what requirement related to its currency?