* Total inflation 1.5 pct on year, 0.3 pct on month
* Core inflation 1.4 pct on year, 0.2 pct on month
* Forecast: 1.3 pct on yr, 0.1 pct on month, for total and
* Inflation jump lessens rate cut probability
By Randall Palmer
OTTAWA, Feb 21 Canada's annual inflation rate
unexpectedly jumped to 1.5 percent in January from 1.2 percent
in December, reducing the likelihood of an interest rate cut by
the disinflation-preoccupied Bank of Canada.
Statistics Canada also said on Friday the monthly rise in
prices in January from December was 0.3 percent, again more than
expected, after a decline of 0.2 percent in December. Core
inflation, which excludes volatile items like fruit and
gasoline, also came in higher than expected at 1.4 percent on an
annual basis and 0.2 percent on a monthly basis.
The median forecasts in a Reuters survey of analysts for
both total and core inflation was 1.3 percent on the year and
0.1 percent on the month. The last time inflation was as high as
1.5 percent was in June 2012.
The central bank targets inflation of 2 percent and tries to
keep it within a range of 1 to 3 percent. It has had to balance
its apprehension about low inflation with its concern about the
effect that any further monetary stimulus might have on high
household debt levels and housing prices.
"Higher inflationary pressure in Canada, or at least the end
of disinflation pressures, feeds directly into Bank of Canada
expectations and will remove any pricing for an interest rate
cut in Canada, and so is Canadian dollar positive," said Camilla
Sutton, chief currency strategist at Scotiabank.
The inflation data indeed helped the Canadian dollar pare
earlier losses, though sentiment was moderately tempered by a
1.8 percent seasonally adjusted decline in December retail
sales, in which severe weather was a
The currency rose to C$1.1143 to the U.S. dollar, or 89.74
U.S. cents, at 9 a.m. EST (1400 GMT), from C$1.1170, or 89.53
U.S. cents, just before the release.
Overnight index swaps, which trade based on expectations for
the central bank's policy rate, showed traders pared back their
already small bets on a rate cut in 2014 after the inflation
report was released.
"The inflation numbers are still below the mid-point of the
target range, so the Bank of Canada can focus on sustaining
growth, and that implies the overnight rate holding steady in
the near term," said Paul Ferley, assistant chief economist at
Royal Bank of Canada.
"In our view it's going to be 2015 before the overnight rate
starts to move up."
The largest factors driving prices higher during January
were passenger vehicles, natural gas, electricity and water. The
year-over-year rise was led by higher costs of shelter, which
rose by 2.1 percent on a 12-month basis after December's 1.9
percent 12-month increase.