Canadian Inflation Accelerates to Highest Rate in Two Years on Jump in Oil

Canada’s inflation rate accelerated in March to the fastest in 2 1/2 years, exceeding all economist forecasts, adding pressure on the Bank of Canada to increase its policy interest rate in the next three months.

Consumer prices rose 3.3 percent from a year earlier after a 2.2 percent gain in February, Statistics Canada said today in Ottawa. Prices were up 1.1 percent on a monthly basis, the fastest since January 1991 when a new federal sales tax was introduced. The gains exceeded all forecasts in Bloomberg surveys of 25 economists, which had median estimates of 2.8 percent for annual inflation and 0.6 percent on a monthly basis.

The annual report also exceeded the Bank of Canada’s April 13 forecast that inflation would reach 3 percent by June, driven by temporary factors such as energy costs and higher provincial sales taxes. The two-year government bond yield jumped the most since December after the report and the Canadian dollar rose the most in seven weeks.

“It definitely puts the pressure back on the Bank of Canada to raise interest rates,” said Sheryl King, head of Canada economics at Bank of America Merrill Lynch in Toronto. “It’s not going to be the end” for inflation pressures, she said, adding the economy may already be operating at full capacity, while the central bank predicted last week the economy wouldn’t be running flat out until the middle of next year.

Dollar Jumps

The Canadian dollar advanced 0.9 percent to 95.56 cents per U.S. dollar at 10:36 a.m. in Toronto, from 96.42 yesterday. One Canadian dollar buys $1.0465. Yields on the two-year Government of Canada bond jumped 9 basis points to 1.78 percent, the biggest one-day gain since Sept. 8.

The odds of an increase at the next decision May 31 increased to 14.6 percent, according to a Credit Suisse calculation, from 11 percent yesterday and 9 percent on Apr. 15.

“May is still a bit of a stretch” for a move, said David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit. “They will need to use that communique to shade the market’s perspective towards a hike in July.”

The core inflation rate, which excludes eight volatile items such as gasoline, accelerated to 1.7 percent from a year earlier, from February’s record low 0.9 percent. Monthly core prices accelerated to 0.7 percent from 0.2 percent in February. Economists forecast a core inflation rate of 1.2 percent annually and 0.2 percent on a monthly basis.

Core Inflation

Bank of Canada Governor Mark Carney said that “underlying inflation is subdued” at an April 13 press conference, and that core inflation would remain below 2 percent until mid-2012 because of slack in the economy and “modest” wage gains. He also said risks to the inflation outlook were “roughly balanced.”

Energy prices rose 13 percent in March from a year earlier, and the cost of fuel oil and other fuels jumped 31 percent, Statistics Canada said today.

“In the immediate short term, our top priority is the rising commodity landscape,” Jerry Fowden, chief executive officer of beverage maker Cott Corp. (BCB) said on a March 24 earnings call. “This scale of commodity run up, at the same time as a broadly weak economy, is almost unprecedented.”

High gasoline prices were mentioned several times at a French-language leadership debate last week in the campaign for a May 2 election. The average Canadian price of unleaded gasoline was C$1.25 ($1.30) per liter the week of April 8, up 20 percent from three months earlier. Prime Minister Stephen Harper said his government’s cut to the federal sales tax has helped consumers cope with higher gasoline prices, while Bloc Quebecois leader Gilles Duceppe called for tougher enforcement of competition laws.

Widespread Increases

Today’s report showed price gains accelerated in every major category except for alcohol and tobacco. Clothing and footwear prices rose 0.9 percent in March from a year earlier, the first annual increase since November 2009, as stores offered fewer discounts.

Food prices rose 3.3 percent after February’s 2.1 percent gain as poor weather in the U.S. and Mexico cut supplies of fresh vegetables.

The central bank sets interest rates to keep inflation at the 2 percent midpoint of a 1 percent to 3 percent target range. Its quarterly survey of businesses published April 4 found the share of executives who predicted inflation would advance by more than 3 percent over the next two years had increased to 15 percent from 3 percent.

Statistics Canada also reported today that wholesale sales fell in February for the first time in seven months and growth in the agency’s index of leading economic indicators slowed in March.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Christopher Wellisz at cwellisz@bloomberg.net.

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