In February, Canada's annual inflation rate unexpectedly rose to 2.6%, exceeding projections due to prices being pushed up by the conclusion of a sales tax break at the middle of the month. This marked the first time in seven months that consumer prices saw an increase above the 2% mark, which is the midpoint of the Bank of Canada's target range of 1% to 3%. Excluding the impact of the tax break, inflation would have been at 3% in February as per Statistics Canada.

The higher inflation pressure is likely to deter the Bank of Canada from implementing a rate cut next month unless there is significant deterioration in key economic indicators like GDP and unemployment. Prices increased by 1.1% on a monthly basis in February, a notable jump from the previous month's 0.1%, according to Statscan data.

Industry analysts had predicted a yearly inflation rate of 2.2% and a 0.6% monthly increase in February. The Bank of Canada had forecasted inflation to reach 2.5% in March due to price pressures stemming from tariff-related uncertainties.

While prices rose across various categories, significant increases were seen in restaurant food, certain clothing items, and alcohol post the expiration of the tax break. Food prices climbed by 1.3% annually, clothing and footwear by 1.4%, transportation by 3%, and shelter costs by 4.2%.

Economists suggested that the sales tax break had distorted the overall inflation figures, and pointed to core inflation as a more reliable indicator of consumer price trends. The Bank of Canada relies on two core inflation measures - CPI-median and CPI-trim. In February, CPI-median rose to 2.9%, and CPI-trim increased to 2.9% as well, compared to 2.7% in January.

Market expectations indicate a 59% likelihood of the Bank of Canada pausing its interest rate cutting cycle next month.