Canada’s inflation rate slides to 1.8% amid a disinflationary base effect from last year’s sales tax holiday

Canada’s inflation rate eased to 1.8% in February, the lowest since July of last year. 

The deceleration in the headline CPI year-over-year (YoY) growth rate can mostly be explained by the base effect resulting from the GST/HST holiday last year. 

• The sales tax holiday started on Dec 15, 2024, and ended on Feb 15, 2025. Consequently, last February saw an artificially high month-over-month (MoM) inflation rate. 
• As this sales tax-induced spike in the February MoM rate drops out of the YoY calculation, the base effect brings down the YoY inflation rate to 1.8%.

Among the subcomponents that were affected by the GST/HST holiday, food from restaurants is the most prominent example of the distortion effect. 

• The 4.3% MoM price growth for food from restaurants in Feb 2025 is now replaced by a mere 0.1% MoM growth in Feb 2026, bringing the latest YoY inflation down to 7.8% from 12.27% in January. 
• The disinflationary base effect will likely continue in March, as food from restaurants booked a 4.7% MoM increase in March last year. 

On the other hand, the persistently high inflation rate for food from stores, which includes groceries, has garnered significant attention from the general public. 

• The good news is that the inflation is receding, as the YoY inflation rate dropped to 4.1%, from 5% in December, after seeing a second flat (0%) MoM reading in the last three months. 

The disinflationary trend also seems more broad-based than just the base effect from tax holiday. 

Looking at the last three months’ reading of the so-called core measures—CPI-trim and CPI-median, both of which are preferred gauges of underlying inflation pressure by the Bank of Canada—we can see that inflationary pressure has been subdued. The annualized three-month inflation rate of CPI-trim was only 0.74% while that of CPI-median was 1.27%, both substantially lower than the central bank’s 2% target. 

Looking ahead, the inflation picture in Canada will become more complicated in March as high energy prices resulting from the Iran War enter the CPI calculations. 

• Energy prices were already rising in February in anticipation of a US-Iran confrontation. The surge in gasoline prices will likely make the YoY rate for energy less negative. 
• The low inflation rate in energy is mostly due to the removal of the consumer carbon tax last April. This base effect will disappear in May, which can potentially turn the energy picture upside down if the Iran War persists for an extended period.