Canada core annual inflation posts surprise jump, tamping rate cut odds

OTTAWA (Reuters) - Canada’s annual inflation rate rose 2.2% as expected in November on the back of higher energy prices, Statistics Canada said on Wednesday, but analysts noted a surprise increase in core measures that could make it harder for the Bank of Canada to ease rates.

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Analysts in a Reuters poll had forecast an annual inflation rate of 2.2%. The Canadian dollar strengthened to 1.3127 to the U.S. dollar after the data, approaching a seven-week high.

CPI common, which the central bank says is the best gauge of the economy’s underperformance, was at 1.9%, while CPI median, which shows the median inflation rate across CPI components, was at 2.4%. CPI trim, which excludes upside and downside outliers, was at 2.2%.

“We are seeing a bit of quiet persistent firmness in core inflation,” said BMO chief economist Doug Porter, noting the rise in the median measure is the highest reading seen in a decade.

The average of the three core measures rose to 2.2% from 2.1%. Analysts said the unexpected uptick in core measures could challenge the Bank of Canada, which has sat firmly on the sidelines since October 2018 even as several of its counterparts have eased.

“While the BoC can look past the headline moves, since this is all driven by base effects, the core inflation measures do make it much harder to cut in this environment,” said Robert Both, a macro strategist at TD Securities.

The Bank of Canada held its overnight interest rate steady earlier in December and said inflation could increase temporarily in the coming months because of year-over-year increases in gasoline prices.

Inflation, it added, was expected to track close to its 2% target over the next two years despite the anticipated increase.

The Bank of Canada, Porter said, could likely tolerate a headline number slightly higher than 2% but said if inflation rose too high, the central bank may need “to consider trying to calm things down a bit.”

“That would almost be a worst-case scenario, if you’ve got an upswing in core inflation when the economy is sluggish at best,” he said.

Prices for goods, Statscan said, rose 2.3% year-over-year in November, while prices for services increased 1.9%.

Meanwhile, energy prices rose 1.5% year-over-year in November after declining by 2.9% in October, largely on higher gasoline prices, Statscan reported. Meat prices jumped 5.2% year-over-year, marking the fifth month of increases at or above 4.0%.

Reporting by Kelsey Johnson in Ottawa, additional reporting by Fergal Smith and Nichola Saminather in Toronto, Editing by Paul Simao and Steve Orlofsky