Inflation jumps, interest rate hikes unlikely to follow

OTTAWA — Canada’s inflation rate jumped to 2.4 per cent last month on the strength of higher energy prices, but analysts say they don’t think the increase is big enough to prod the central bank to boost interest rates at this time.

OTTAWA — Canada’s inflation rate jumped to 2.4 per cent last month on the strength of higher energy prices, but analysts say they don’t think the increase is big enough to prod the central bank to boost interest rates at this time.

The gain of 0.4 per cent in the annualized rate takes the overall inflation rate above the Bank of Canada’s ideal target of two per cent.

But that doesn’t mean Canada has an inflation problem, or that price pressures will lead to higher interest rates soon, analysts said Tuesday.

CIBC economist Emanuella Enenajo equated Canadian inflation to candy — “crunchy on the outside, but with a soft core.”

Stripping away volatile items, particularly the energy component and a 13 per cent boost in gasoline prices, yields a core rate of 1.5 per cent, well within the Bank of Canada’s target range of 1.0 to 3.0 per cent.

Average inflation for the entire year of 2010 was 1.8 per cent, much higher than the recession-influenced 0.3 per cent of 2009, but also within the bank’s target.

As well, inflation is still artificially boosted by the introduction of the harmonized sales tax in Ontario and British Columbia, which central bank governor Mark Carney has said he will ignore in his thinking on interest rate policy.

“While these factors are likely to keep average inflation a bit above two per cent in 2011, core inflation looks set to remain comfortably docile around current trends through much of the year, with the strong Canadian dollar helping keep a firm lid on import costs,” said Douglas Porter of BMO Capital Markets.

The latest data “isn’t going to prompt many to change their view on the Bank of Canada, but it strengthens the case that the bank can take its time before hiking rates again,” Porter added.

TD Bank’s Diana Petramala said she senses markets are finally starting to accept the view that Carney is in no hurry to start tightening money supply by raising rates.

She said the bank may keep the trendsetting policy rate at one per cent until July, barring any sudden resurgence in robust growth.

While the central bank’s major focus is on inflation, it’s the economy, in particularly the fragile nature of the recovery, that is still uppermost in Carney’s mind, analysts said.

Another reason to be cautious about raising interest rates is the dollar, which has been hovering near parity with the U.S. currency — making imports relatively less expensive and Canadian exports more costly for foreign buyers.

December’s inflation surge was mostly about energy. Along with the jump in gasoline, natural gas rose 9.2 per cent from last year, electricity 6.2 per cent, and transportation costs, which are heavily influenced by gasoline prices, rose 4.9 per cent.

Consumers also paid 4.3 per cent more for insurance premiums on passenger vehicles.

Inflation pressures on most other items measured by Statistics Canada tended to be more moderate: 1.5 per cent more on auto purchases; 2.7 per cent more on shelter; 1.7 per cent more for food, and 1.7 per cent more for household operations, furnishings and equipment.

Meanwhile, mortgage interest rate costs declined 2.5 per cent in December and clothing and footwear fell by two per cent on an annual basis.

Regionally, Statistics Canada said consumer prices rose in every province last month. Ontario continues to have the highest inflation rate in the country at 3.3 per cent, and Alberta the lowest at 0.8 per cent.