Inflation up sharply

OTTAWA — Canada’s inflation rate shot up to attention-grabbing levels last month as higher prices for cars, gas and vehicle insurance pushed the consumer price index to a 14-month high.

OTTAWA — Canada’s inflation rate shot up to attention-grabbing levels last month as higher prices for cars, gas and vehicle insurance pushed the consumer price index to a 14-month high.

All the inflation indicators rose in January: the overall consumer price index jumping by more than half-a-point to 1.9 per cent, the Bank of Canada’s core index hit two per cent and the month-to-month index increased 0.3 per cent.

January’s increase means the annual rate has gone from minus 0.9 per cent to a positive 1.9 per cent in four months.

Scotia Capital economist Derek Holt said the “stickiness” of underlying core inflation may cause Bank of Canada governor Mark Carney to consider moving off his conditional commitment to keep interest rates at historic lows until July.

What will be worrying Carney is that prices didn’t drop as much as expected during the crisis last year and may now outpace expectations during the recovery, Holt said.

“The bank has pretty much all the rationale to hike now,” Holt said.

He noted that markets have freed up, there’s been a resumption in job creation and the economic growth in the fourth quarter is thought to have approached four per cent.

In addition, Finance Minister Jim Flaherty announced this week that the government will tighten the rules for mortgage borrowers — describing the move as a means to prevent home buyers from getting too far into debt and to thwart real-estate speculation while interest rates are exceptionally low.

“There may be an argument for keeping rates low to the end of the year, but the argument for emergency rates has ended,” Holt said.

The central bank’s next scheduled announcement on rates is March 2, a day after Statistics Canada issue its next report on gross domestic product.

Other analysts agreed that Carney’s finger is almost certainly getting itchy, but argued he is unlikely to go back on his commitment to keep the central bank’s key rates where they are until this summer unless prices threaten to go higher.

It seems more likely that prices will go down, said Bank of Montreal economist Benjamin Reitzes, noting that much of the headline inflation in the January report is based on temporary factors.

That’s because Canada’s inflation story is still mostly all about what happened to gasoline prices last year, when crude oil was seeking a bottom in the depths of the global economic crisis.

Statistics Canada said the cost of filling your gasoline tank at the pump was 23.9 per cent higher this January than a year ago, but noted that “prices at the pump have been relatively stable since July 2009.”

Excluding the important energy component, Canada’s national inflation rate looked a little more tame at 1.3 per cent.

“If inflation is a little higher than the (central bank) would like, maybe that advances their timetable … but their credibility is at stake,” Reitzes said.

Holt said even if Carney does not move before July, markets will likely start pushing longer-term interest rates north sooner in expectation of the bank acting.

Overall, six of the eight major components the statistical agency uses to measure inflation rose last month.

Besides gasoline, the other key contributors to inflation came from the cost of purchasing vehicles and insurance, property taxes and eating out at restaurants.

Meanwhile, while the cost of mortgage interest, natural gas, women’s clothing and fresh vegetables fell.

The key food component, which had been rising most of last year, has already come back to earth and advanced a meagre 1.4 per cent in January, the smallest in almost two years.

In the current low-interest environment, the amount Canadians paid on interest on their home mortgages was a major source of disinflation, falling 5.5 per cent in January.

Property taxes, however, rose 4.3 per cent and rent 1.4 per cent.

Regionally, Statistics Canada said all provinces saw consumer prices increase last month, with Atlantic Canada experiencing the biggest gains ranging from 3.1 per cent in Nova Scotia to four per cent in Prince Edward Island.

The agency said gasoline prices were mostly responsible, with the year-over-year increases in Atlantic Canada’s inflation rate — with prices rising from 26.5 per cent in Newfoundland and Labrador to 35.6 per cent in New Brunswick.

British Columbia had the lowest annual inflation rate at 0.7 per cent.