Canada Inflation Jumps to Highest in a Year on Currency Drop

Updated on

The Canadian dollar’s sharp drop over the past year is beginning to stoke inflation.

The consumer price index rose 2 percent in January from a year earlier, Statistics Canada said Friday from Ottawa, the highest since November 2014 as the U.S. dollar’s gain drives up food costs in Canada.

The jump in prices, which exceeded economist expectations, poses a problem for a central bank that is scrambling to shore up growth with historically low borrowing costs as the country struggles with a plunge in commodity prices. Worries about the impact of the currency kept Governor Stephen Poloz from cutting interest rates last month.

“All those anecdotes about higher cauliflower prices certainly came through in this report,” said David Tulk, chief Canada macro strategist at Toronto Dominion Bank. It “speaks to the concern the Bank of Canada had which probably made them more cautious about cutting rates last month.”

Poloz’s decision to keep his benchmark rate at 0.5 percent at a rate decision on Jan. 20 halted a slide in the currency that saw the Canadian dollar fall to a 13-year low.

The depreciation sparked a wave of on-line discussions and news stories, with the price of cauliflower -- which jumped to more than C$7 -- a lightning rod.

Fresh Vegetables

Food costs rose 4 percent in January from a year earlier, including an 18.2 percent surge in fresh vegetables and a 12.9 percent rise in fresh fruit. Most of Canada’s fresh produce is imported through the winter and the cost reflects a decline in Canada’s dollar against U.S. currency.

The central bank has argued much of the “pass-through” effect from the weaker dollar will be temporary. A 5 percent gain in the Canadian dollar since the rate decision will also help ease worries, Tulk said.

“It’s probably transitory just given what the currency has done since,” Tulk said.

Inflation in January rose from 1.6 percent in the prior month.

Transportation costs were the other major contributor to faster inflation, rising 2.2 percent in January compared to a

0.6 percent pace in December. Gasoline costs increased 2.1 percent, the first gain since October 2014.

Clothing and footwear was the only major category where prices declined in January with a 0.3 percent drop.

On a monthly basis, total inflation advanced 0.2 percent in January and the core rate rose 0.3 percent. Economists surveyed by Bloomberg predicted that overall monthly prices would little changed and the core rate would gain 0.2 percent.

(Updates with analyst comment from fourth paragraph.)

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