TD Bank economists say that Canadian inflation is going to look hot in the coming months, but the Bank of Canada is expected to play it cool.

“Canadians may be in for a shocker on the inflation front over the next few months. Even under conservative assumptions, the year-over-year rate of inflation is likely to spike to almost 4% by the end of the year, and could edge even higher. But, more importantly from a monetary policy standpoint, the Bank of Canada’s measure of core inflation is already running well within the upper half of its 1%-3% target band at 2.5%, and will come close to breaching the top of the range in the months ahead, notes TD.

With such high readings, it may be expected that the Bank of Canada will step up with some aggressive rate hikes. But TD suggests not. “The spike in Canada’s inflation rate will certainly make for flashy headlines, but it is unlikely to ruffle any feathers at the Bank of Canada,” it says. “A closer inspection of the data shows that all of the increase in the core inflation rate over the past few months is the result of a number of one-off price movements that have little to do with underlying price pressures.”

TD says that the key issue is how much of the apparent increase in core inflation. It argues that the core CPI has been boosted by two separate shocks over the past few months — sharp increases in energy prices in Ontario following the deregulation of the electricity market, and auto insurance premiums have spiked up in several provinces over the course of the year. “Clearly, both of these events are in the category of one-off price adjustments, which do not reflect underlying inflation trends,” it says.

TD suggests that all of the upward movement in the core rate of inflation since the beginning of the year can be attributed to these two price shocks. “In their absence, the “inner core” rate of inflation has been running steadily between 1.5% and 1.8% all year — within the bottom half of the Bank of Canada’s target band. Based on this measure, there is indeed very little for the Bank of Canada to be worried about,” TD concludes.