Canadian Inflation Unexpectedly Accelerates on Surge in Airfares

(Bloomberg) -- Canadian inflation unexpectedly accelerated last month on a surge in airfares, but underlying price pressures held steady, giving the Bank of Canada some breathing room on interest rates.

The consumer price index gained 2 percent in December from a year ago, up from November’s 1.7 percent pace, as air-transport prices surged 22 percent. Economists expected inflation to be unchanged at 1.7 percent. Core measures -- seen as a better gauge of price pressures -- remained at about 1.9 percent.

Even with the unexpected pick-up, the overall inflation picture remains benign, with few signs of the price pressures that could prompt the Bank of Canada to act with more immediacy. Most economists expect the central bank, after lifting borrowing costs five times since mid-2017, will stay on hold for the next few months before resuming hikes.

“While there’s nothing here to drive the bank off the sidelines anytime soon, the underlying firmness in prices keeps them very much in play later this year,” Doug Porter, chief economist at Bank of Montreal, said in a note to investors.

To be sure, there are some signs of pressure outside the core measures. Inflation in the services sector hit 3.5 percent in December, the highest since August 2008. Excluding gasoline, consumer price inflation was 2.5 percent, the fastest since 2014.

Canadian Inflation Unexpectedly Accelerates on Surge in Airfares

Still, policy makers tend to look more closely at the core figures and those have stayed at near 2 percent for more than a year. There also seems to be a statistical quirk around airfares, with Statistics Canada saying the numbers should be treated with caution because of calculation changes.

A core rate at near 2 percent is consistent with an economy at full capacity -- but not one that is overheating. This gives the Bank of Canada scope to proceed with caution on further interest-rate increases, an approach it has already indicated in recent communications.

Inflation in the fourth quarter averaged 2 percent, in line with projections released last week by the central bank, which also expects inflation will average 1.7 percent in the first quarter and slow further by the middle part of the year before accelerating back to 2 percent by the end of 2019.

Overall, 2018 saw inflation finish above the central bank’s target for the first time in seven years -- averaging 2.3 percent, compared with 1.6 percent in 2017.

©2019 Bloomberg L.P.