February 24, 2017 / 1:37 PM / 2 years ago

Canada annual inflation hits two-year high, driven by gasoline

OTTAWA (Reuters) - Canada’s annual inflation rate jumped to a stronger-than-expected 2.1 percent in January, its highest for more than two years, government data showed on Friday, bolstering the Canadian dollar.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

Analysts said that the rise was unlikely to affect the Bank of Canada’s monetary policy since underlying inflation was considerably tamer.

The main reason for the jump in overall inflation was a 20.6 percent year-on-year jump in gasoline prices, the largest yearly increase since September 2011, Statistics Canada said.

Once energy prices were stripped out, though, year-on-year inflation was only 1.4 percent.

Analysts polled by Reuters had forecast an annual rate of 1.6 percent, below the Bank of Canada’s 2.0 percent target. Inflation in Canada has not been this strong since October 2014, when it hit 2.4 percent.

“I would view the overall report as dovish. And I think that’s how the Bank of Canada will (see) it,” said Derek Holt, head of capital markets economics at Scotiabank.

The central bank has held rates steady at 0.5 percent since cutting them twice in 2015, citing labor market slack and an output gap that the bank does not expect to close until mid-2018.

Consumers paid 2.4 percent more for shelter while food prices slipped by 2.1 percent from January 2016.

All three new measures of core inflation the Bank of Canada established late last year showed underlying inflation below 2.0 percent.

“There is nothing here for the Bank of Canada to get too excited about. It just reinforces the message that inflation is just not on the radar in Canada,” said Sal Guatieri, senior economist at BMO Capital markets.

The Canadian dollar initially hit a one-week high of C$1.3060 to the U.S. dollar, or 76.57 U.S. cents, up from C$1.3104, or 76.31 U.S. cents. It later gave up most of its gains.

One of the new measures of core inflation - CPI common, which the central bank says is the best correlation to the output gap - was furthest away from target, slipping to 1.3 percent from 1.4 percent.

CPI median, which shows the median inflation rate across CPI components, remained at 1.9 percent while CPI trim, which excludes upside and downside outliers, increased to 1.7 percent from 1.6 percent.

“My sense is that the Bank of Canada will look through this just given that all three measures of core are running below two percent,” said Andrew Kelvin, senior rates strategist at TD Securities.

Additional reporting by Fergal Smith and Solarina Ho in Toronto; Editing by Chizu Nomiyama and W Simon

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