Canadians are returning from their tax holiday to find inflation trashed the place while they were gone. Statistics Canada (Stat Can) data shows the Consumer Price Index (CPI) surged in February. An uptick was already expected due to temporary suppression from the tax holidays, but broad inflation has now appeared. The rate was already set to smash through the central bank’s upper tolerance level—before the BoC provided more inflation stimulus with its most recent rate cut.
Canadian Inflation Surges As Broad-Based Price Growth Accelerates
Canadian inflation got a big boost as growth accelerated and reduction measures eased. CPI saw massive 1.1% growth in February, meaning more than half of the Bank of Canada (BoC) annual target was accomplished over a 28-day span. Yeah, last month was the shortest month, and preceded the central bank’s inflation-stimulating rate cut last week.
Annual growth advanced 0.7 points to 2.6% in February, with Stat Can noting the move was broad-based. This indicates that the pressures were broadly observed across categories. In fact, more than half of CPI components are above the 3-point upper bound of tolerance for the BoC.
BoC-Preferred Measures Look Even Worse Than Canada
Core CPI, the BoC-preferred measures, look even worse. These measures minimize the influence of volatile components to provide a clearer picture of the trend. Both CPI-Trim and CPI-Median rose to 2.9% annual growth in February. Annualized 3-month growth is now above the tolerance threshold for both the CPI-Median (+3.4%), and CPI-Trim (+3.3%). The 6-month trend also sits above the upper bound, indicating inflation is way too hot. It’s also about to get even hotter.
Bank of Canada Trashed The Place While You Were On A Tax Holiday
As previously mentioned, the GST/HST holiday partially offset the rising CPI. Since CPI prices include sales taxes, a minority of components were artificially suppressed—arguably having a disproportionate impact. As these taxes are reintroduced, the artificial suppression will be removed. When excluding the effect of indirect taxes, headline CPI’s annual growth hits 2.9% in February, within spitting distance of breaching the tolerance.
The tax holiday ran until mid-February, meaning half of the month was still suppressed. March data won’t have any of those downward pressures, revealing a much higher rate even before the impact of general inflation—which is, once again, broad-based. Then there’s the rate cut just delivered by the BoC, which they opted to do despite knowing the acceleration was coming.
It’s easy for the average household to appreciate that rate cuts were delivered to offset the trade war. However, the central bank knew that was to gain political favor since that’s not how monetary policy actually works. While they were applauded for slashing interest costs, the decision drove inflation expectations and financing costs even higher.
What can deliver a bigger blow to Canadians than a trade war? Rising inflation, higher home prices, and more unemployment—also known as stagflation. That’s where poorly made monetary policy decisions can take us—even if the trade war is resolved promptly with minimal casualties.