OTTAWA, March 16 (Reuters) - Canada's annual inflation rate fell to 1.8% in February, driven by base year effects as prices in the same period a year ago had risen sharply after the government's sales tax relief ended, Statistics Canada said on Monday.
Excluding the effect of indirect taxes, the Consumer Price Index rose 1.9% year over year in February, it said.
The inflation data for March will be the final month affected by the base-year effect of the sales tax break.
Economists polled by Reuters had expected inflation to fall to 1.9% year-over-year in February from 2.3% in January, and 0.7% month-over-month compared with no change in the prior month.
On a monthly basis consumer prices rose by 0.5% in February, StatsCan said.
The inflation data comes as the Bank of Canada has held its key policy rate at 2.25%, as inflation stabilized around its 2% target within a 1-3% control range.
But with the war in the Middle East and rising crude oil prices, inflation expectations and forecasts are likely to change.
The BoC will give some indication on inflationary pressures this week when it announces its latest monetary policy decision.
Despite the base year effect, food prices in February rose by 5.4% on a annual basis as food purchased at restaurants increased by 7.8% last month.
Food prices have remained a major pressure point for Canadian households, economists say, particularly as grocery prices have risen faster than overall inflation due to an array of factors such as U.S. President Donald Trump's tariffs, bad weather conditions and supply chain issues.
Grocery prices rose 4.1% in February after a 4.8% rise observed in January, and the statistics agency said they have risen by 30% in the last five years.
Gasoline prices decelerated by 14.2% in February due to the continued impact of the removal of a carbon tax on the fuel, which reduced the year-over-year price. This impact will stay till April, StatsCan said.
Shelter costs — the largest component of the CPI basket with a weight of roughly 29% — rose by 1.5% in February as mortgage costs continued to ease. Rent costs rose 3.9% on an annual basis in February.
Economists and the Bank of Canada closely watch core measures of inflation to gauge underlying price pressures.
The CPI-median, the centermost component of the CPI basket, was 2.3%, while CPI-trim, which excludes the most extreme price changes, was also at 2.3%.
The Canadian dollar firmed and was trading up 0.28% to $1.3679 against the U.S. dollar, or 73.10 U.S. cents.
Reporting by Promit Mukherjee; Editing by Dale Smith and Andrea Ricci
