Canada's Inflation Surprise: February's Unexpected Surge Explained

In February, Canada's inflation rate unexpectedly rose to 2.6%, driven by a sales tax break conclusion. This unexpected rise impacted currency markets and interest rate expectations. Analysts initially predicted lower rates, but after tax effects, inflation pressures remained, notably in food, clothing, and transportation categories.

Canada's inflation rate unexpectedly rose to 2.6% in February, largely due to the end of a recent sales tax break, according to data released Tuesday. This marks the first time in seven months that the rate exceeded the Bank of Canada's 2% mid-point target. January's inflation stood at 1.9%.

Without the influence of the tax break, February's inflation would have reached 3%, as stated by Statistics Canada. This shift in inflation expanded market expectations for a pause in the interest rate-cutting cycle next month, now exceeding 70% from an initial 59%.

The Canadian dollar rose marginally after the data release, trading up 0.06% to 1.4283 against the U.S. dollar. Two-year government bond yields also saw a rise, increasing by 5.7 basis points to 2.596%. Price hikes were chiefly apparent in restaurant food, clothing, transportation, and shelter costs.

(With inputs from agencies.)