Inflation is easing, RBC says

Claire Fan says Canadian inflation pressures continued to ease in February, though rising oil prices and supply disruptions in some food categories could push price growth higher in the near term.

In a March 16 report, the Royal Bank of Canada economist said headline inflation slowed to 1.8% year-over-year, but noted that comparisons remain distorted by last year’s temporary GST/HST holiday and the removal of the federal consumer carbon tax in April 2025.

Fan said the Bank of Canada’s preferred core inflation gauges — CPI trim and CPI median — provide a clearer signal. Those measures averaged 2.3% year-over-year in February, the slowest pace in nearly five years, while the three-month annualized rate slowed to about 1%, well below the central bank’s 2% target.

“The moderation in those core CPI measures is welcome as it suggests easing demand-driven inflation pressure,” Fan said.

Still, she noted that Canadian households continue to face supply-driven price pressures in certain grocery items, including beef and coffee, where production disruptions tied to adverse weather have constrained supply.

Energy prices may also push inflation higher in the short term. Fan said elevated oil prices linked to ongoing Middle East tensions are likely to translate into stronger energy inflation in March.

Despite those risks, RBC expects policymakers to remain cautious.

“We don’t expect the Bank of Canada to rush to respond until gaining more clarity on the scope, duration and growth-inflation trade-off of the current shock,” Fan said, adding the central bank is expected to hold its overnight rate at 2.25% at this week’s meeting.

Elsewhere in the February data, food inflation slowed to 5.4% from 7.3% in January, partly reflecting distortions from last year’s tax holiday that temporarily reduced restaurant prices. Those base effects should fully unwind in March.

Shelter costs, a major driver of inflation in recent years, also showed further signs of cooling. Rent inflation slowed to 3.9%, the first reading below 4% in four years, while mortgage interest cost growth eased to 0.7% as earlier rate hikes continue to roll out of mortgage renewals.

Overall shelter inflation fell to 1.5% year-over-year, the lowest level in five years.

Fan added that broader price pressures across the economy also moderated. About 31% of the consumer basket recorded price increases above a 3% annualized pace between December and February, down from 42% in January, suggesting inflation pressures are easing across a wider range of goods and services.

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