The Canadian Consumer Price Index saw a larger-than-expected monthly increase of 0.6% in February, pushing the year-over-year rate to 1.5% from 1.3% in January. The surprise has economists talking rate hikes.

Bank of Montreal notes that the Bank of Canada compiles an alternative “core” measure that excludes the eight most volatile price components along with the impact of indirect taxes. “On this basis, the annual rate also showed a sizeable deterioration to 2.2% in February from 1.8% in January. This deterioration largely reflects the impact of clothing prices and electricity both of which are included in the Bank of Canada core measure.”

It notes that the Bank’s core rate is still relatively close to the 2% mid-point of its inflation target range “and thus does not flag any immediate inflation problem”. However, BMO notes, “The sizeable deterioration in the annual rate this month could raise concerns about the inflation outlook in subsequent months.”

BMO Neesbitt Burns says, “Canadian consumer prices are displaying some unexpected life, making it that much more likely that the Bank of Canada will not bide its time for long before starting to raise rates.”

RBC Financial Group economists says that these stronger than expected numbers “will likely bring a flood of pronouncements that interest rates are heading up starting as soon as the next Bank of Canada meeting in April. However, we continue to believe the Bank’s first move won’t come until mid- to late-summer and that February’s inflation surprise will be temporary.”

“Economists are rushing to their spreadsheets to revise forecasts in response to a steady stream of stronger-than-expected economic results,” says CIBC World Markets. “And today’s surprise core reading could require a re-think of the earlier call for 1.5% core inflation in the latter half of this year. While we continue to expect core prices to moderate below 2% in the coming months, a resilient labour market and evaporating capacity should keep the year-over-year from diving too far below target.”

CIBC notes that the magnitude of the upside surprise in today’s report saw the market move to increase the odds of a near-term rate hike by the Bank, “and suggests that Dodge and company could even move slightly ahead of the Fed. But with core inflation still near the mid-point of the target band, the ultimate timing of the first rate hike should depend more on the upcoming labour market data.”

“The rise in inflation is consistent with expectations that the Bank of Canada will start to raise interest rates by mid-year. However, the motivation is more to unwind current very stimulative monetary conditions on indications that the economy has not only returned to positive growth but appears to be on a strong upward trajectory,” says BMO.