Canada’s annual inflation rate fell to 1.8 per cent in February, Statistics Canada said on Monday, with the end of last year’s “tax holiday” reflected in the year-over-year numbers but the Iran war still missing from the picture.

February’s inflation rate slowed compared to the same time last year, as prices were driven higher when the GST break ended mid-month, the data agency said, in what economists refer to as a “base effect.”

Food prices saw the biggest slowdown, mostly driven by slower growth in prices for fresh and frozen beef. But StatsCan noted that grocery prices have risen more than 30 per cent since February 2021.

Gas prices, meanwhile, recorded a smaller decline (14.2 per cent) compared to the same time last year, mostly due to higher prices for crude oil in the lead-up to the war in the Middle East and some disruptions in oil-producing countries.

Gas prices likely to jump in March report

However, the full brunt of the war’s impact, which began on the last day of February, won’t be reflected until next month’s inflation report. One economist expects gas prices to skyrocket as much as 15 per cent.

That would be “well above year-ago levels, driving headline inflation towards 3 per cent in [the] coming months,” wrote Douglas Porter, chief economist at the Bank of Montreal, in a note to clients.

While the GST break clouded the headline number and the war looms over next month’s report, the Bank of Canada’s preferred measures of core inflation — which strip out volatile components like gas prices or tax changes — actually moderated last month.

CPI-common dropped from 2.7 per cent to 2.4 per cent, CPI-median dropped from 2.5 per cent to 2.3 per cent and CPI-trim dropped from 2.4 per cent to 2.3 per cent, bringing each of the measures closer to the central bank’s two per cent target for inflation.

“With most measures of core inflation close to the Bank’s 2 per cent target, policymakers can more readily ‘look through’ the oil-driven spike that is surely coming to headline inflation in the next few months,” wrote Porter.

“And that is particularly the case with employment weakening even before the war, and the uncertain fate of the USMCA [trade deal] still looming.”