OTTAWA (Reuters) - Canada’s annual inflation rate surged unexpectedly in February on higher food and shelter costs, but the Bank of Canada is expected to ignore the price pressures as it ponders whether to cut interest rates to fresh historic lows.
Statistics Canada said annual inflation jumped to 1.4 percent from 1.1 percent in January despite declines in gasoline and vehicles prices compared with a year earlier.
Compared with January, gasoline prices spiked and automobile prices stabilized, leading to the first month-on-month rise in the consumer price index since last September. The CPI jumped 0.7 percent from January, more than double the 0.3 percent rise analysts had forecast.
The Canadian dollar briefly strengthened after the report before falling back.
Economists said the rise in inflation would likely be short-lived and would do little to take the central bank’s focus away from an economy in full recession.
“The CPI numbers are higher than expected, but ultimately, with the slack that’s developing in the Canadian economy, we do think that prices will ultimately trend lower,” said Charmaine Buskas, senior economists strategist at TD Securities.
“It doesn’t really change the view that the Bank of Canada is probably going to be looking at different measures to support the economy,” she said.
The Bank of Canada, which targets 2 percent inflation, cut its benchmark interest rate earlier this month to an all-time low of 0.5 percent and has signaled it may move beyond rate cuts to other forms of easing to pull the economy out of a recession.
It could cut rates one more time on April 21.
Governor Mark Carney has promised to lay out a framework in an April 23 report for possible “credit and quantitative easing”, which could involve printing money to purchase securities outright in the market and thereby driving down longer-term interest rates.
Core inflation, which reflects underlying price trends by stripping out eight volatile items such as gasoline, vegetables and mortgage interest costs, held steady at 1.9 percent year-on-year. Core CPI spiked 0.5 percent on the month versus a forecast of a 0.2 percent increase, Statscan said.
“Core inflation is still below where (the central bank) expect it and the bigger focus is still on the weak outlook. It might temper the doves a little bit but the big picture is that inflation is still below target and the bank is still looking at an extremely weak economy for the first half of this year,” said Doug Porter, deputy chief economist at BMO Capital Markets.
The central bank said this month it now expects core inflation to stay lower than it had predicted in January, when it saw the rate reaching a low of 1.1 percent in the fourth quarter before rising again.
The bank projected a period of falling prices in the second and third quarters, rising throughout 2010 and reaching the 2 percent target in the first half of 2011.
(Additional reporting by Jennifer Kwan, John McCrank and Euan Rocha in Toronto)
Editing by Theodore d'Afflisio