Canada's annual inflation rate has fallen to 1.8% in February, according to Statistics Canada. This marks a significant decrease from the 2.3% increase recorded in January. The slowdown in the Consumer Price Index (CPI) is largely attributed to the base-year effect, stemming from the end of the GST/HST break that occurred mid-February last year. As this month-over-month increase from 2025 fell out of the 12-month price movement, it created a decelerating effect on headline inflation.
The base effect primarily relates to how the comparison is made against the previous year's data. In February 2025, the end of the GST/HST break caused consumers to pay more for affected products, creating a higher base for comparison. Now that this period has passed, the current inflation rate appears lower in contrast. Excluding the impact of indirect taxes, the CPI rose 1.9% year over year in February.
While the headline inflation rate has decreased, other factors are influencing the Canadian economy. Food purchased from stores saw a 4.1% increase, driven by beef products. There was downward pressure from gasoline (-14.2%) and natural gas (-17.1%). The Bank of Canada is expected to hold its overnight rate at 2.25%, while closely monitoring core inflation measures. These measures, which exclude volatile swings and indirect tax changes, averaged 2.3% year-over-year, the slowest pace in almost five years.
Looking ahead, March 2026 will be the final month impacted by the base-year effect related to the GST/HST break. Economists anticipate that as these base effects diminish, other factors, such as rising oil prices due to Middle East tensions, may exert upward pressure on inflation in the coming months.
