End of federal tax holiday in February expected to lift inflation: economists

BMO expects the end of the federal government's two-month sales tax holiday drove inflation higher in February. Statistics Canada's offices at Tunny's Pasture in Ottawa are shown on Friday, March 8, 2019. THE CANADIAN PRESS/Justin Tang

OTTAWA — Economists are expecting the annual rate of inflation accelerated in February as the federal government’s temporary tax break came to an end mid-month.

Statistics Canada is set to release February inflation figures on Tuesday.

Economists polled by Reuters expect the annual inflation rate rose to 2.2 per cent last month, up from 1.9 per cent in January.

A series of household staples and common gifts like electronics, as well as alcohol and restaurant bills, saw the federal sales tax waived from Dec. 14 to Feb. 15.

Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, says the tax holiday will have a see-saw effect on inflation.

“That helped pull prices down in December and January and now, it’s going to do the exact opposite in February and March,” he said in an interview.

BMO and TD are predicting inflation accelerated to 2.2 per cent in February.

RBC projects a faster pace of 2.5 per cent, with economists Nathan Janzen and Carrie Freestone writing in a report that the end of the tax holiday likely boosted price growth.

Though a pickup in the Canadian economy was building heading into 2025, the authors said “concerns that intensifying international trade risks will weigh on the economy are overshadowing stronger recent growth data.” They expect further interest rate cuts from the Bank of Canada.

The February inflation data will not reflect the direct impact of Canada’s tariff war with the United States, which kicked off in early March.

Sustained tariffs risk reigniting inflation, wrote TD economist Maria Solovieva in a report — threatening the Bank of Canada’s “hard-won” battle to bring inflation back down to its two per cent target.

“This limits how far the BoC can cut rates to support demand,” she wrote.

Reitzes said threats of tariffs may show up in the inflation data through the flagging Canadian dollar, which has largely suffered compared with the American greenback since U.S. President Donald Trump’s re-election.

The weak loonie will continue to drive up prices of goods imported from the U.S. in February, he warned, which in the winter includes fresh fruit and vegetables grown south of the border.

Reitzes also said he expects to see a small tick up in the metrics of core inflation that are closely watched by the Bank of Canada. These measures strip out more volatile inputs to the consumer price index such as gasoline and food to give the central bank a clearer picture of underlying inflation.

Signs of “stubbornness” in core inflation are unlikely to go away in the months to come, Reitzes said. But he added that the central bank appears more concerned with the “breadth” of inflation for the time being, which has lately been consistent with periods of price stability.

The Bank of Canada delivered its seventh consecutive interest rate cut last week and issued a stark warning about the looming hit to the Canadian economy and possible spike in inflation thanks to the trade war and associated uncertainty.

The central bank’s next decision is set for April 16.

Reitzes said that, rise or fall, the February inflation data will be “not terribly impactful” in the Bank of Canada’s decision making.

If the tariff dispute suddenly wraps up, the recent inflation data would be much more informative for future rate decisions, he said. But as it stands, the trade war is the biggest factor dictating the future path for inflation in the years to come.

Reitzes said the Bank of Canada will continue to use rate cuts in the near term to respond to fears of an economic downturn, but it’ll also try to keep inflation under wraps for the extent of the trade disruptions, limiting how low it can take the policy rate.

“It’s not a one-month thing. It’s over the next year or two or three, and that’s what they’re very much focused on and avoiding any inflation impact on that front,” he said.

This report by The Canadian Press was first published March 16, 2025.

Craig Lord, The Canadian Press