Canada Inflation Accelerates to Fastest Pace in Three Years

(Bloomberg) -- Canadian inflation picked up more than analysts expected in February to the fastest in more than three years as signs point to price pressures continuing to build.

Consumer prices accelerated to an annual pace of 2.2 percent in February, the most since 2014, from 1.7 percent a month earlier. Economists had anticipated a 1.9 percent increase. Core prices -- which exclude more volatile items like energy and are considered a gauge of inflation pressures -- inched higher for a fifth month to 2.03 percent, which is the fastest since 2012.

The budding inflation could add pressure on the Bank of Canada -- which has kept the expansion going with low interest rates -- to keep hiking borrowing costs to more normal levels.

Canada Inflation Accelerates to Fastest Pace in Three Years

Inflation running close to the central bank’s 2 percent target suggests an economy operating near capacity, and investors are anticipating at least two more rate increases this year, after the Bank of Canada hiked borrowing costs three times since July. The central bank has been forecasting inflation will hover at about 2 percent over the next couple of years.

“Inflation is BAAAACK, but its not yet a scary monster, being essentially in line with what the Bank of Canada actually wanted to see,” Avery Shenfeld, chief economist at CIBC World Markets, said in a note to investors.

The Canadian dollar jumped higher on the report, and was up 0.6 percent to C$1.2861 per U.S. dollar at 9:02 a.m. in Toronto trading.

Statistics Canada cited higher prices for gasoline, cars, and mortgage interest costs as main contributors to annual inflation. The minimum wage increase in Ontario in January also continue to have an impact, at least with restaurant prices which were up in the province 6.6 percent from a year ago. Nationwide, restaurant prices were up 4 percent.

Even with inflation around its target, the central bank has been warning there still may be slack in the economy, particularly in the labor market. The pick up in prices also comes at a time when the economy is slowing, another reason to be cautious for the Bank of Canada.

Statistics Canada also reported on Friday that retail sales grew 0.3 percent in January, weaker than economists had forecast. Coupled with continued uncertainty around U.S. trade policy and a slowdown in the housing market, the Bank of Canada may look past the inflation numbers for now, according to Krishen Rangasamy at National Bank of Canada in Montreal.

“The central bank may stick to its loose stance for another few months,” Rangasamy said in a note to investors.

Highlights of CPI Report

  • The average of the Bank of Canada’s three key core inflation measures rose to 2.03%. That’s the highest since a 2.1% rate in February 2012. The average had last hit the 2% threshold in June 2016.
  • All three so-called core measures accelerated. The “common” core increased to 1.9% from 1.8%. The “median” core rate rose to 2.1% from 1.9%. The “trim” measure was up to 2.1% from 1.8%.
  • Inflation for services was 2.6% in February, the highest since September 2011. Goods inflation was 1.7%
  • On a monthly basis, overall prices were up 0.6%, versus economist expectations for 0.4%
  • Seasonally adjusted, consumer prices nationally were up 0.2% in February

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