Canada inflation rate jumps but retail sales sag

Fri Feb 21, 2014 11:55am EST
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By Randall Palmer and Leah Schnurr

OTTAWA/TORONTO (Reuters) - Canada's annual inflation rate jumped unexpectedly last month to its highest in 1-1/2 years, alleviating concern that the country is headed for disinflation and reducing the likelihood the Bank of Canada will be forced to cut already low interest rates.

But the impact of the positive inflation data was offset by a figures that showed a slump in retail sales in December as harsh winter weather kept consumers at home. The drop was the biggest in 12 months and reinforced expectations that the economy likely shrank in the last month of 2013.

Canada's annual inflation rate rose to 1.5 percent in January from 1.2 percent in December, Statistics Canada said on Friday, above economists' expectations for a 1.3 percent increase. The last time the consumer price index (CPI) was as high as 1.5 percent was in June 2012.

The central bank targets inflation of 2 percent and tries to keep it within a range of 1 to 3 percent. The bank has had to balance its apprehension about low inflation with its concern about the effect that providing further monetary stimulus might have on already high household debt levels and housing prices.

"The strong CPI number that we got is a clear reflection of the fact that we don't have a disinflationary trend in Canada and some of the decline, or softness, in prices was basically based on noise," said Benjamin Tal, senior economist at CIBC World Markets, in Toronto.

Higher costs for shelter boosted the inflation rate on an annual basis in January, while higher costs for passenger vehicles, natural gas, electricity and water drove prices up on a monthly basis.

Economists expect the increase in prices in February will not be as strong as in January as it will be measured against a sharp rise in February 2013.

Worried by weak inflation, the Bank of Canada shifted policy gears last year, dropping any mention of an increase in interest rates. In its last policy announcement, it left the door open to a rate cut.   Continued...

The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie