Canadian consumer prices jumped more than expected in January rising 0.8% in the month and 4.5% over the past year. The news has economists anticipating rate hikes as soon as next week from the Bank of Canada.

Energy prices were the main factor behind rise in the Consumer Price Index from January 2002 to January 2003.

The energy component was up 10% in the month and 15.3% on the year. Food prices were also up a strong 0.9%. The largest monthly increase came from electricity, which jumped 18.8%, almost entirely due to prices in Ontario returning to more normal levels after the $75 rebate payment in December.

From January 2002 to January 2003, the CPI excluding energy increased 3.5%, the third consecutive identical 12-month increase.

Bank of Montreal notes that the jump in electricity prices also had a significant upward impact on the Bank of Canada’s core measure which rose a greater-than-expected 0.7% in the month and 3.3% over the year. It says that the electricity component accounted for 0.5% of the January monthly increase.

“The large monthly and annual rates of increase will likely raise some concerns at the central bank of these increases making their way into inflationary expectations,” says BMO. “However, much of the January pressure is emanating from a single component: electricity. The average monthly increase of the Bank of Canada’s core measure over the last two months is a relatively modest 0.1%. If this average were to persist for the next three months, as is possible, the core measure would drop to 2.1% by April and thus very close to the Bank of Canada’s mid-point target of 2.0%.”

BMO Nesbitt Burns says, “Today’s higher-than-expected CPI result will put enormous pressure on the Bank of Canada to follow through with a rate hike next week. Even with a 25 bp move, the overnight target rate would be just 3%, still below the trend in core inflation and still very stimulative.”

“This morning’s consumer price report came in as a shocker, and without doubt, it dramatically increases the odds of a Bank of Canada interest-rate hike at next Tuesday’s fixed-announcement date,” agrees TD Bank. It recognizes the oversized importance of electricity in the inflation, but says that there is enough inflation elsewhere in the economy to justify a rate hike.

CIBC World Markets says that with today’s upside surprise, the market has now moved to price in a roughly 75% chance of a quarter-point rate hike by the Bank of Canada next week. “And although a period of slower economic growth ahead means the inflation threat is largely temporary, the sense is the Bank may have talked itself into a corner when it comes to a rate hike next week.”

RBC Financial says that there continues to be a great deal of uncertainty about the Bank of Canada’s decision. “The recent appreciation of the Canadian dollar has provided a fair degree of tightening in monetary conditions already and lacklustre economic activity in the U.S. appears to be creeping north alongside mounting geopolitical risks. However, if history is any guide, as soon as war breaks out in the Gulf or a diplomatic resolution is reached, consumer, business and investor confidence should bounce back along with growth prospects,” it says.

http://www.statcan.ca/Daily/English/030227/d030227a.htm