Canadian Inflation Surprises to the Downside Again in February

Canada’s inflation rate continues to surprise to the downside. After unexpectedly cooling to 2.9% in January, economists expected the headline inflation rate to rise to 3.1% in February. That didn’t happen. Instead, Canada’s inflation rate cooled to 2.8%.

Mortgage and rent interest costs were the biggest driver of the inflation rate. After a 4% decline in January, gas prices inched up 0.8% in February. And, for the first time in more than two years, grocery prices in Canada climbed at a slower pace than the headline inflation rate.

Canada’s core inflation rate, which strips out volatile sectors like goods and energy, slowed to 2.83% in February from 3.1% in January. It’s important to keep an eye on the core inflation rate because the Bank of Canada is looking for “sustained easing” in core inflation before lowering interest rates.

The fact that inflation is cooling so quickly shows that higher interest rates are having the desired effect of taming inflation. And, because the changes in interest rates take a while to work their way through the economy, the Bank of Canada has said it could start lowering interest rates before inflation is back to the central bank’s 2% target.

The Bank of Canada makes its next decision on interest rates on April 10. Slowing inflation has increased the chances for an early June rate cut to 70%. It was at 50% before February’s inflationary data came out.

You can’t discount the odds of an April rate cut either. Before the February inflationary data was released, the odds of an April cut were 18%. After the numbers were released, the bets for an April rate cut climbed to over 28%.

Either way, the Bank of Canada will need to move aggressively on interest rate cuts. Delaying the decision beyond June could negatively impact the Canadian economy, which has been straddling a recession for months. It would also put further strain on the finances of the average Canadian and corporate earnings.

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Canada’s headline inflation rate fell for its second consecutive month in February to 2.8% with core inflation slowing to 2.83%. With higher interest rates doing their job of cooling inflation, the Bank of Canada has little to no excuse for keeping its policy rate at decade highs. How would an April or June rate cut impact Canadian stocks? Ask the trading professionals at Learn-To-Trade.com.

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