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Inflation cools to 1.7%, but underlying rate continues to heat up

Last Updated Feb 23, 2018 at 11:56 am EDT

The annual pace of inflation cooled to 1.7 per cent last month – but rising prices underneath the turbulence of this headline number suggest the Bank of Canada is unlikely to veer from its interest-rate hiking path.

A new Statistics Canada report Friday showed the average of three core inflation measures, designed to filter out the noise of more-volatile items like energy prices, advanced once again in January to hit 1.8 per cent. It represented the reading’s highest mark since September 2016.

Average core inflation has been on a steady monthly climb since it fell to 1.3 per cent in May 2017. The movement suggests underlying consumer prices have been creeping higher along with Canada’s recent economic strength.

The upward momentum of underlying prices is an important piece of data because it’s certain to catch the attention of the inflation-targeting Bank of Canada, analysts said Friday.

Since the bank’s inflation bull’s-eye is two per cent, the latest reading reinforced experts’ expectations that Bank of Canada governor Stephen Poloz will continue to gradually raise the trend-setting interest rate. He’s already hiked the rate three times since last summer.

Central banks can boost their benchmark rates as a way to slow the march of inflation.

“They’re very data dependent and … potentially we could have more rate hikes in order to keep inflation close to that two per cent mark,” James Marple, senior economist for TD Bank, said of the Bank of Canada.

“We’re basically there now.”

Poloz’s next rate announcement is set for March 7. The Bank of Canada has repeatedly stressed it will scrutinize the data when considering future rate decisions.

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Marple said TD is predicting the Bank of Canada’s next rate increase to come in July, but he noted a hike could come sooner.

Other experts pointed to the underlying number Friday as another sign the central bank will make more than one more move in 2018.

“While overall price growth slowed, gains in core price measures remained firm, leaving the Bank of Canada on track to lift interest rates two more times this year,” Alicia Macdonald, the Conference Board of Canada’s principal economist, said in a statement.

CIBC’s Royce Mendes said even though core inflationary pressures are “heating up” he predicts the Bank of Canada to remain cautious.

“The Canadian economy is still facing potential headwinds from NAFTA renegotiations, U.S. tax cuts and new mortgage rules,” Mendes wrote in a note to clients.

Overall, Statistics Canada’s headline inflation reading of 1.7 per cent for January was weaker compared with a 1.9 per cent result in December and 2.1 per cent in November.

The federal agency said the main downward forces on inflation last month were due to cheaper prices for video and digital equipment, electricity and travel tours.

The report said the primary upward pressure on inflation was driven by higher costs for air transportation, gasoline and restaurants.

Those pricier meals away from home helped propel food prices 2.3 per cent higher than they were a year earlier – for the biggest increase in the reading since April 2016.

Year-over-year gas prices were up 7.8 per cent last month after a 12.2 per cent gain in December.

By region, Statistics Canada found that consumer prices rose at a slower annual pace last month in eight of the 10 provinces. Only British Columbia, with 2.1 per cent inflation, and Ontario, with 1.8 per cent inflation, saw bigger year-over-year price increases.