Economists expect inflation to have picked up in February in Canada amid rising gas prices.
Statistics Canada is expected to release its Consumer Price Index (CPI) data for February on Tuesday. Forecasters agree on a 3.1% price rise from February 2023, which would reverse some progress made in January, when the annual inflation rate slowed to 2.9%.
According to Royce Mendes, general manager and head of macroeconomic strategy at Desjardins Group, we should expect another acceleration in inflation due to the rise in energy prices during the month. “It seems that in the coming months, inflation will probably rebound to around 3%,” in his opinion.
An increase in inflation will slightly complicate the strategy of the Bank of Canada, which should begin to reduce its key interest rate in the coming months.
But Royce Mendes says the main focus on Tuesday will be on underlying price pressures, which help economists gauge the direction inflation is heading.
During the Bank of Canada’s interest rate decision earlier this month, Governor Tiff Macklem noted that nearly half of the components of the Consumer Price Index were increasing at a rate greater than 3%. In times of more normal inflation, only about a quarter of these components grow as quickly.
At the same time, Governor Macklem stressed that the central bank did not want to cut interest rates prematurely and would therefore wait until there was clearer evidence that inflation was soon heading towards the 2% target set by the bank. The Bank of Canada has held its key interest rate at 5% since July, awaiting further evidence that inflation is moving closer to 2%, and its latest projection suggested inflation would reach that target in 2025, a forecast shared by many economists.
One of them, Douglas Porter of BMO Financial Group, says a source of uncertainty in these forecasts comes from energy prices, which generally have a significant effect on overall inflation. “Oil prices can move very quickly and make many inflation forecasts appear hit or miss.”
Tuesday’s Statistics Canada inflation reading will be its last before the Bank of Canada’s interest rate announcement in April, which Douglas Porter called a “crucial decision.” Although the central bank is not expected to change its policy rate next month, many forecasters predict it will do so at the next policy meeting in June.
“I think if the bank wants to cut interest rates in June, it will have to send a pretty strong signal at the April meeting,” according to economist Porter.
However, the chief economist said the central bank cannot guarantee anything because a lot can happen in two months. Additionally, the Government of Canada is expected to present its budget a week after the rate decision in April, which could affect the inflation outlook.
There will still be two months of economic data for the Bank of Canada to evaluate before its June decision.