Canada’s February CPI came in at 1.8%, down from 2.3% in January and below forecasts. Excluding indirect taxes, inflation was 1.9%, which was under 2.0% for the first time in 15 months.
Shelter inflation eased to 1.5%, below its 1999–2019 average of 2.2%. Bank of Canada core measures averaged 1.0%, pointing to broadly slower price growth across components.
The report notes the data predates the latest rise in oil prices linked to conflict in the Middle East. It projects headline inflation could move towards 3.0% in coming months as higher oil prices feed through.
Core inflation is expected to be less affected in the short term. The piece also refers to an economy in oversupply and uncertainty linked to tariffs.
The item was produced using an AI tool and reviewed by an editor. It is attributed to the FXStreet Insights Team, which compiles market observations from external experts and internal and external analysts.
Looking back at the situation in early 2025, we saw inflation was well under control before the Middle East conflict caused oil prices to spike. At that time, headline inflation had dropped to 1.8% and core measures were even lower at an average of 1.0%. The main driver for this softness was moderating shelter costs, which were running below their long-term pre-pandemic averages.
This underlying weakness gave us confidence that the Bank of Canada would look through any temporary, oil-driven jump in headline inflation. As we expected, headline CPI did accelerate, touching 2.9% by August 2025 as higher energy costs filtered through the economy. However, the Bank held its policy rate steady through the summer, correctly identifying the shock as transitory and focusing on the weak domestic demand.
That patience was justified as the economy showed signs of faltering in the second half of the year, with Q4 2025 GDP growth coming in at a tepid 0.6% annualized. With the effects of the oil shock fading and the economy operating with excess capacity, the Bank of Canada shifted its stance. We saw them deliver two consecutive 25-basis-point rate cuts in the fall of 2025, bringing the overnight rate to its current level.
Today, while headline inflation has settled back down to 2.2%, core inflation has proven stickier than anticipated last year and is now hovering around 2.5%. This persistence is limiting the Bank’s appetite for further immediate cuts, creating a state of policy tension. The market, as seen through overnight index swaps, is now pricing in roughly a 40% chance of one more rate cut by the end of this year, a significant shift from the more aggressive cutting cycle priced in during 2025.
For derivative traders, this means the straightforward trade of betting on lower rates is now more complex. With the Bank of Canada likely on hold in the immediate future, selling volatility through options strategies like strangles on bond futures could be advantageous. This position would profit from a period of stability as the market waits for a clearer signal on either inflation or economic growth.
Given the recent strength in the US dollar, traders should also consider positioning for the USD/CAD exchange rate to remain elevated. The rate differential between the US and Canada continues to favour the US dollar, with the pair trading near 1.3850, up from the 1.35 level seen in early 2025. Buying call options on USD/CAD provides upside exposure if Canadian economic data disappoints further, while limiting downside risk.
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