Canada inflation up, but rates pressure muted

(QMI Agency files)

(QMI Agency files)


, Last Updated: 7:48 AM ET

OTTAWA  - Canada’s annual inflation rate edged up in January but the increase is unlikely to put pressure on the Bank of Canada, which looks set to keep interest rates on hold for much of 2012.

The annual rate increased to 2.5 percent in January from 2.3 percent in December on higher prices for energy and transportation, Statistics Canada said on Friday.

The year-over-year increase was slightly greater than the 2.3 percent predicted by market operators.

The Bank of Canada, which set a target range of 1 percent to 3 percent for inflation, has made clear it will keep interest rates low for the time being. Most economists expect the next rate hike in early 2013.

“We are not seeing aggressive pressures one way or the other, so it just confirms the Bank of Canada’s very neutral stance at this point,” said Mark Chandler, head of fixed income and currency strategy at RBC.

The central bank held its key interest rate at an ultra-low 1 percent in January for the 16th straight month and gave no indication it planned to move rates either up or down.

The bank has predicted that year-on-year inflation in the first quarter of 2012 will be 2.2 percent, dropping to 1.7 percent by the fourth quarter, before recovering to 2 percent by the third quarter of 2013.

The Canadian dollar rallied to C$0.9948 against the greenback, or $1.0052, from around C$0.9961, or $1.0039, immediately before the release.

Energy prices increased by 6.5 percent in the 12 months to January, compared with an equivalent 6.0 percent advance in December. Year-over-year transportation costs rose by 3.7 percent in January after increasing by 3.3 percent in December.

“This puts inflation back closer to the track that they had laid out in ... in January, so I don’t think this is going to move the needle for the Bank,” said Doug Porter, deputy chief economist at BMO Capital Markets.

The closely watched annual core inflation rate, which strips out the prices of volatile items such as fuel and some foods, climbed to 2.1 percent from 1.9 percent in December.

Consumer prices went up by 0.4 percent in January from December on higher food and transportation costs. The core rate increased by 0.2 percent over the same period.