Canada updates consumer price index inflation figures for February on Tuesday, noted Scotiabank.

The overall reading is expected to jump sharply higher, but key will be the details, said the bank.

Several forces may combine to put significant upward pressure on Canadian inflation over the next two reports but the one after that potentially being a weaker one, stated Scotiabank. In theory, the panoply of one-off distortions should have the Bank of Canada looking through their effects, but inflation is likely to be highly volatile through this period, so reducing the BoC's confidence toward reading the tea leaves and probably resulting in a "cautious" bias.

The bank estimated total CPI in February will increase by 1.1% month over month on a seasonally unadjusted basis as per the polling convention. That could translate into a seasonally adjusted rise of about 0.9% month over month using the pattern of recently higher-than-usual seasonal adjustment factors for the months of February. The year-over-year rate should rise to about 2.7%.

One key driver is that the temporary cut in the Goods and Services Tax and the HST -- in provinces that have one -- expired last Saturday, pointed out Scotiabank. Statistics Canada will capture this effect for about half of the month, which means that CPI should get a 0.4% lift from the tax effect. That's symmetrical to the estimated impact of the mid-December GST/HST cut as measured by the spread between the change in CPI excluding the effects of changes in indirect taxes and the overall CPI index that month.

Another key driver behind the unadjusted estimate is that February is normally a strong up-month for prices in Canada. It's a time of year when retailers optimistically begin rolling out spring lines on the expectation that Canadians will be in a rush to snap up new bathing suits and sundry other less weighty accouterments, and so February's core CPI often rises by 0.6% to 0.8% month-over-month NSA, added the bank.

Major drivers typically include clothing and footwear prices plus the recreation, education and reading category. Gasoline prices were also a bit higher in February.

When it comes to seasonal adjustments, the pandemic-era has seen the highest SA factors for like months of February on record which, assuming it continues this time, is likely to inflate the seasonally adjusted change, claimed Scotiabank.

Key, however, will be the BoC's preferred core measures of inflation-trimmed mean CPI and weighted median CPI that have been running at an elevated rate. They exclude the direct effects of changes in sales taxes so the end of the GST/HST cut shouldn't be the same driver that it's expected to be for headline CPI.

The core measures don't, however, exclude the indirect incidence effects of tax changes that are difficult to estimate, according to Scotiabank. Key will be whether retailers, restaurants and bars and other consumer spending sectors shrink margins and prices to offset the tax increase, preserve margins they appeared to have padded when the tax was temporarily cut, or continue to raise core prices in keeping with the pattern over recent months.

That boils down to an empirical question for which the bank lacks adequate data to assess until it sees the actual numbers and then any revisions.