GST respite, tariffs main drivers behind inflation
The consumer price index for February increased by 2.6 per cent year over year, according to newly released data from Statistics Canada.
The report indicated a significant increase in inflation compared to January, where there was a 1.9 per cent raise, with StatCan attributing the rise to the Feb. 15 removal of GST and HST holidays which spanned the entirety of January.
“With the federal tax break ending on February 15, the GST and HST were reapplied to eligible products,” read the StatCan announcement. “This put upward pressure on consumer prices for those items, as taxes paid by consumers are included in the CPI.”
The rate at which inflation increased was certainly a surprise to Bipan Rai, Managing Director and Head of ETF/Structured Solutions Strategy at BMO Global Asset Management. Rai said inflation is proving to remain more stubborn than initially expected, with StatCan calculations suggesting inflation would have risen by three per cent had the tax holiday not been in place. StatCan warned of the long-term inflationary impacts of US President Donald Trump’s sweeping tariffs and Canada’s counter-tariffs, which Rai says will become more clear by the time March’s inflation report is released.
StatCan’s latest inflation figures put the Bank of Canada in a tricky situation, according to Rai. He suggested there is an approximately 40 per cent chance of an eighth successive interest rate cut in April, though the higher-than-expected inflation numbers could cause the BoC to revise planned rate cuts.
“If we're in an environment of a protracted trade war, the near-term risk for the Bank of Canada is that you have inflation remaining stickier than expected,” Rai said. “The Bank of Canada might keep rates on hold or elect to pause for a little bit longer, even though there are longer-term ramifications from a protracted trade war that could be disinflationary in nature.”
While the indirect and direct implications of Trump’s tariffs are likely to impact consumers’ wallets, Rai suggested the slashing of the consumer carbon tax could offset some of the inflationary implications of tariffs. He also added that the residual effects of the GST holiday could carry into next month’s inflation figures.
For investors and advisors looking to navigate a highly volatile market, Rai suggested having a tightened duration exposure. He pointed to multiple BMO ETFs that he believes have low volatility and are protected against the market’s current uncertainty.
“The better part of the last couple of quarters has been really ensuring that when it comes to your duration exposure, especially here in Canada, you want to tighten that and try to maximize as much of the yield as you can,” he said. “We like low volatility as a strategy going forward. If we're talking about secure price pressures and a backdrop of a trade war, it certainly makes sense to us that if you want to have exposure to Canadian equities, that low volatility as a strategy could work.”
Prices increased between January and February in each province, though were most acutely felt in Ontario and New Brunswick. Meanwhile, gas prices jumped by 0.6 per cent from January to February, though the price was a deceleration on an annual basis.
Dining out was another contributor to the high level of inflation, as buying from restaurants declined year over year, with restaurant food prices contributing the largest acceleration in February’s price index.
