Fresh produce on display at one of the vegetable stands in the St. Lawrence Market in downtown Toronto. Statistics Canada says the annual rate of inflation eased to 5.2 per cent in February. FRED LUM/THE GLOBE AND MAIL

Canada’s annual inflation rate fell to 5.2 per cent in February, the biggest drop since the early stages of the pandemic, although grocery prices are still climbing by more than 10 per cent.

Financial analysts had been expecting an inflation rate of 5.4 per cent in Tuesday’s report from Statistics Canada. Inflation cooled from a 5.9-per-cent increase in the Consumer Price Index (CPI) in January. The slowdown was the largest since April, 2020.

Inflation is expected to cool further in the coming months. The Bank of Canada projects the annual rate of CPI growth will ebb to around 3 per cent by the middle of the year, then return to its 2-per-cent target by late 2024.

Financial analysts widely expect the central bank to hold its benchmark interest rate at 4.5 per cent in next month’s rate decision, on account of how inflationary pressures are waning.

The recent decline in the annual inflation rate is largely because the initial effects of Russia’s invasion of Ukraine – which led to spiking prices of commodities, such as crude oil and wheat – are no longer part of the year-over-year calculation of inflation, given the length of the war. This is known as a base effect.

Even so, short-term changes in prices have dampened. On a monthly basis, the CPI rose 0.1 per cent in February, after adjustments for seasonality, compared with a 0.3-per-cent gain in January.

There were, however, signs of stickiness. Excluding food and energy, core CPI was up 4.8 per cent on an annual basis in February, down slightly from a 4.9-per-cent gain in January.

The Bank of Canada and other central banks are being tested by inflation that remains too high, but also by distress in the financial system, after the collapse of Silicon Valley Bank and the emergency takeover of Credit Suisse.

Unlike many of its peers, the Bank of Canada had already moved to the sidelines, putting a “conditional pause” on further increases to its benchmark interest rate. Inflation appears to be cooling more rapidly in Canada than in the United States and Britain.

“With inflation subsiding on both the headline and core measures, the Bank of Canada is in a less awkward position than many others during the recent financial turmoil. That is, there’s really no underlying reason for the Bank to hike further,” Bank of Montreal chief economist Doug Porter said in a note to clients.

“Over all, the Bank’s pause looks prudent, and we expect them to stay at current levels for quite some time, barring a major flare-up in the banking turmoil,” Mr. Porter added.

A noteworthy aspect of Statscan’s report is that the annual inflation rate was weaker than growth in average hourly wages, which rose 5.4 per cent in February from the previous year. It was the first time this measure of wage growth had exceeded inflation in two years. The average Canadian has experienced an erosion of purchasing power over this inflation crisis.

Gasoline has been a big contributor to slowing inflation. Prices at the pump fell nearly 5 per cent in February from a year earlier – the first annual drop since the outset of 2021.

There were other notable areas of decline. Child-care costs fell by 27.5 per cent on an annual basis as the national child-care deal led to a sharp reduction in fees.

Grocery prices rose 10.6 per cent on a 12-month basis in February. While that was improved from January’s pace of 11.4 per cent, it was the seventh consecutive month of double-digit increases.

“Continuing to put upward pressure on grocery prices are supply constraints amid unfavourable weather in growing regions, as well as higher input costs such as animal feed, energy and packaging materials,” Statscan said in its report.

The housing sector has been on a rollicking ride. Over all, shelter costs rose 6.1 per cent in February on a 12-month basis – better than 6.6 per cent in January. However, mortgage interest costs surged by nearly 24 per cent, the fastest pace since 1982.

In recent months, economists have looked to short-term trends in inflation for a sense of how the situation is changing. Expressed at an annualized rate, the three-month change in core CPI (excluding food and energy) was 3.4 per cent in February, up from 3.1 per cent in January – and just outside the Bank of Canada’s target range of 1 per cent to 3 per cent.

The central bank will make its next rate decision on April 12. Bank officials have said they would only resume hiking interest rates if they see an “accumulation of evidence” that consumer price growth is not easing as expected.

In response to the CPI report, financial analysts said the Bank of Canada is likely to stick with its pause.

“There was nothing in [Tuesday’s] inflation report that would move the Bank of Canada off of its pause on interest rate moves,” said Leslie Preston, senior economist at Toronto-Dominion Bank, in a note to investors. “Unlike the [U.S.] Federal Reserve, domestic inflation trends mean the BoC can ride out the current volatility in financial markets driven by stresses in the banking sector internationally.”

The Globe and Mail, March 21, 2023