The Bank of Canada’s decision not to raise interest rates last week got some validation with fresh inflation data that shows more price pressure than expected.

Consumers paid 2.2% more in September for the goods and services included in the Consumer Price Index basket than they did in September 2002.

The report surprised economists who had expected flat prices. This makes it unlikely that the Bank of Canada will raise interest rates in the near future.

The September increase follows a 12-month rise of 2% in August. September’s 12-month increase remains well below the recent highs of early 2003, when energy prices, and especially gasoline prices, were providing the bulk of the upward pressure.

Excluding energy, the CPI rose 1.9% from September 2002 to September 2003, after rising 1.6% in August.

Bank of Montreal notes that there was slightly greater energy price pressure with natural gas prices rising 3.8% in the month.

However, greater inflation pressure was also evident in the core CPI, which rose 0.3% in the month, pushing the year-over-year rate up to 1.7% from 1.5% in August.

BMO says that the upward surprise was concentrated mainly in two components: tuition fees which rose 8.1% in the month, and a 3.1% jump in the clothing component.

“Today’s report will, at the margin, dampen talk that the Bank of Canada needs to cut rates to keep inflation from dropping below the low end of their target band (i.e. below 1%),” concludes BMO Nesbitt Burns.

TD Bank agrees, saying, “The fact that core inflation has made a tentative move back towards the Bank of Canada’s 2% target should be enough to keep hopes for another rate cut under wraps — at least for the time being.”

CIBC World Markets is a little more sanguine about inflation, saying, “Despite the upside surprise in the core, this report does little to alter the fundamental near-term path for core inflation. With growth failing to live up to its non-inflationary potential in coming quarters, expect slack to continue to open up in the economy, dulling pricing power and keeping wages under wraps.”

CIBC insists that the rising dollar will keep “a rate cut very much on the table.”