Canada's inflation accelerates in January, could test 3% in spring

FILE PHOTO: St. Catherine Street, a primary commercial artery of downtown Montreal is seen on the first night after a curfew is imposed by the Quebec government to help slow the spread of the coronavirus disease (COVID-19) pandemic in Montreal, Quebec, Canada January 9, 2021. REUTERS/Christinne Muschi/File Photo

OTTAWA (Reuters) - Canada’s annual inflation rate accelerated more than expected in January, data from Statistics Canada showed on Wednesday, and could continue to rise in coming months compared with the low levels reached a year ago during the first COVID-19 lockdowns.

Canada’s inflation rate accelerated to 1.0% in January on higher durable good and gasoline prices, up from a year-on-year increase of 0.7% in December, and beating analyst expectations of 0.9%.

Before easing again, the annual rate could test 3% in April or May due to a combination of higher commodity prices and the statistical comparison to the period of last year’s shutdowns, analysts said.

“In the next few months, with the run-up in oil prices in particular ... and when we compare ourselves to what happened a year ago, we are going to get some very big inflation numbers,” said Doug Porter, chief economist at BMO Capital Markets.

“So I think this is just an opening salvo in terms of what we are about to see for headline inflation.”

But even if inflation were to temporarily top 3%, the upper threshold of the Bank of Canada’s control range for its 2% target, the Bank would be unlikely to change its policy stance, said analysts.

“The central bank will look through that increase and focus on all the ways COVID-19 is still battering the Canadian economy,” said Royce Mendes, senior economist at CIBC Capital Markets, pointing to hard-hit services like airline fares.

The Bank of Canada has said it will keep its key overnight rate at a record low 0.25% into 2023.

Two of the three core measures of inflation moved in January, with all remaining below target. The common measure, which the Bank of Canada says is the best gauge of the economy’s underperformance, was steady at 1.3%, while trim was 1.8% and median was 1.4%.

Reporting by Julie Gordon in Ottawa, additional reporting by Steve Scherer and Dale Smith, Fergal Smith and Maiya Keidan in Toronto; Editing by Alex Richardson, Kirsten Donovan, Sonya Hepinstall and David Gregorio