11:55 AM EDT, 03/16/2026 (MT Newswires) -- Monday's Canadian consumer price index release is already somewhat outdated, given how much the outlook has shifted following the conflict in the Middle East, said National Bank of Canada.

Still, it provides a snapshot of how price dynamics were evolving heading into the conflict, and the picture is "encouraging," noted the bank. Inflation was lower than economists had expected at 1.8% year over year, a significant drop from the 2.3% recorded in January, due to changes in indirect taxes from a year ago.

That said, when indirect taxes are excluded, inflation in Canada is also mild at 1.9% year over year, falling below the 2.0% threshold in February for the first time in 15 months, pointed out National Bank.

It turns out that shelter, the index's heavyweight component, continues to moderate and now stands at just 1.5% year oer year, below its pre-pandemic average (2.2%,1999-2019).

While natural gas prices are certainly contributing temporarily to this moderation as they have fallen sharply following the reduction in the carbon tax in April 2025, that isn't the whole story, according to the bank. In fact, the increase in rent prices is the lowest since January 2022, and mortgage interest payments are up by only 0.7% year-over-year. Recent inflationary pressures are particularly weak, as evidenced by inflation excluding indirect taxes, which is rising at a three-month annualized rate of just 1.5%.

Meanwhile, the core inflation measures favored by the Bank of Canada are rising at an even slower pace, averaging 1.0%, a sign that price moderation across the country is widespread across components. Only 28 out of 55 components are rising at a rate above 2.0% over three months, which is essentially in line with the pre-pandemic historical average.

Looking ahead, National Bank expects inflation to move toward the upper end, 3.0% year over year, of the BoC's target range in the coming months as higher oil prices feed through the economy. That said, assuming some degree of de-escalation in the near term in the Middle East, core inflation should remain relatively insulated from these dynamics in the short term.

This could give the BoC some latitude to look through the rise in headline inflation, particularly since underlying price pressures appeared well contained before the conflict in a context where the economy is in oversupply, weakened by uncertainty over United States tariffs, added the bank.