Core inflation jumps above 2 percent

Fri Mar 19, 2010 7:46am EDT
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OTTAWA (Reuters) - Canada's annual core inflation rate unexpectedly rose above 2 percent in February, adding pressure on the Bank of Canada to raise interest rates later this year and pushing the currency higher.

Core inflation, which excludes volatile items like gasoline, reached 2.1 percent from 2.0 percent in January, pressured primarily by vehicle prices as rebates were lifted, and higher hotel rates due to the Winter Olympics, Statistics Canada said on Friday.

Core CPI jumped 0.7 percent in the month, the biggest increase since November 2008.

"The odds are growing for more aggressive policy tightening in the second half of this year," said Sal Guatieri, senior economist at BMO Capital Markets.

"It's not just a one-month aberration. The core measure has consistently surprised on the upside in the past six months, which suggests that the high Canadian dollar is not dampening prices as much as we would anticipate," he said.

The Bank of Canada targets 2 percent overall inflation but closely watches core CPI, which it considers a more accurate gauge of underlying price pressures.

Markets had predicted the core rate would ease to 1.7 percent annually and climb 0.3 percent in the month, according to a Reuters poll.

Overall inflation climbed 0.4 percent in the month, as expected, and in the 12-month period eased to 1.6 percent from 1.9 percent as gasoline prices rose less sharply. Prices at the pump were 15.3 percent higher than a year earlier, down from 24 percent in January, Statscan said.

The Canadian dollar hit a session high of C$1.01 or 99.01 U.S. cents, up from C$1.0168, or 98.35 U.S. cents just before the report.   Continued...