Canadian Inflation Surges to 2.1% in January on Gas Prices

  • Economists had forecast consumer prices would quicken 1.6%
  • Latest reading poses challenge for Bank of Canada’s Poloz

Canadian consumer prices surged in January on the back of rising gasoline prices and new carbon levies, bringing inflation to the highest in more than two years.

The consumer price index advanced 2.1 percent from a year earlier, Statistics Canada reported Friday from Ottawa, up from 1.5 percent in December. Economists had estimated a gain of 1.6 percent, according to a Bloomberg survey.

The report shows a pick-up in energy prices is sparking inflation, even at a time when the economy seems to be awash in excess capacity. That could be problematic for Bank of Canada Governor Stephen Poloz, who has been worried about underlying weakness in the economy but is mandated to keep inflation in check.

The numbers “make it harder for the BoC to cling onto its dovish message,” Nick Exarhos, an economist at Canadian Imperial Bank of Commerce, said in a note to investors. “But with Poloz still eyeing a wide output gap, don’t expect a shift in the stance of monetary policy any time soon.”

The Canadian dollar rose as much as 0.4 percent after the report, before paring those gains to trade at C$1.3081 per U.S. dollar as of 9:06 a.m. in Toronto, up 0.2 percent on the day.

Carbon Levies

The year-over-year consumer price gain was the fastest since October 2014.

Gasoline prices, which posted a 21 percent gain from a year earlier, was almost totally responsible for the higher inflation reading -- reflecting both rising crude prices, a sharp drop in those prices a year ago in January and new carbon levies. Alberta added a 4.49 Canadian cent-per-liter carbon levy on Jan. 1 and consequently reported one of the biggest increases in gasoline prices, up 15 percent during the month.

Ontario has also introduced a new cap and trade system, but it’s unclear if that has begun to flow through to prices. Gasoline prices in the province rose 7.8 percent during the month of January and were up 20 percent from a year earlier. That’s about the national average.

In Quebec, gasoline prices were up 2.4 percent in January and 13 percent from a year earlier.

Excluding gasoline, consumer prices nationally were up 1.5 percent year-over-year in January, from 1.4 percent in December.

All three of the statistics agency’s core inflation measures -- which attempt to gauge underlying inflation by removing volatile items such as energy -- remained below 2 percent in January from a year earlier, with an average of 1.6 percent.

“The relative stability in core measures suggest that underlying inflation could be basing, but that level of excess supply remain important preventing an increase in inflationary pressures,” Charles St-Arnaud, an economist at Nomura International Plc, wrote in a note. “This report does not change our view that the BoC is unlikely to change its policy rate this year.”

(A previous version of this story corrected the month in second paragraph.)
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