Bank of Canada: High inflation may be temporary

Wed Mar 31, 2010 6:57pm EDT
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada on Wednesday emphasized the temporary nature of February's high inflation, a figure that has raised market expectations of an interest rate increase.

Paul Jenkins, senior deputy governor at the bank, warned against reading too much into a single number and said the central bank must try to understand the real forces pushing prices higher.

"There are some temporary factors at play on the inflation numbers," Jenkins told Reuters in an interview to mark his retirement from the bank on April 7.

The central bank's measure of core inflation, which is normally considered a gauge of underlying price pressures because it excludes gasoline and other volatile items, rose to 2.1 percent in February, above the bank's 2 percent target.

Much of the price shock came from a huge jump in hotel rates due to the Winter Olympics in Vancouver. But the price gains were widespread and most analysts see inflation persisting at levels that appear incompatible with the bank's record low interest rate of 0.25 percent.

But Jenkins was somewhat more sanguine.

"Just as with any one number on the real GDP side, in the case of inflation one needs to make sure you have a fix on the underlying trends of inflation," he said.

"From that point of view, (it means) looking at the various factors that are currently at play and adding those up again to give a sense of where those inflation trends are headed."   Continued...