Canada’s annual inflation rate jumped to 2% in December, up from 1.6% the month before, but the increase was due almost entirely to a one-time refund given to Ontario electricity users a year ago.

Statistics Canada said that $75 refund, which was delivered in December 2002, meant that electricity prices were 18.9% higher last month than they were a year earlier.

The temporary rise in the inflation rate was widely expected.

Leaving energy out of the mix, Stats Can said the annual inflation rate the annual increase in the cost of living was only 1.7% in December — down from November’s 1.8% rate.

On a month-over-month basis, the Consumer Price Index edged up a modest 0.1% in December, following a 0.2% increase in November.

Stats Can said prices increased for fresh vegetables (which rose 12.5%), cigarettes, airline tickets and electricity. Prices went down for cars, hotel and motel stays, and women’s clothing.

The “core” rate of inflation rose to 2.2% on a year-over-year basis, up from November’s 12-month advance of 1.8%., the Ontario electricity rebate of December 2002 was the reason for that increase.

Energy prices rose 6.7% from December 2002 to December 2003. The 18.9% rise in the electricity index was responsible for much of that. But natural gas prices were also 20.6% higher than a year ago. Energy prices rose 0.6% in December alone.

On a month-over-month basis, core inflation actually fell 0.2%. “This marks the first decrease since June 2003,” Statistics Canada said.

Bay Street economists agree that the CPI report is nothing to worry about, and that it won’t derail future cuts to interest rates.

BMO Nesbitt Burns agrees that the jump “is likely a one-off event”. The monthly increase in overall prices reflects increases in tobacco taxes in Ontario and Quebec, and higher natural gas prices that were only partially offset by a 0.5% decline in gasoline prices, and a drop in the cost of auto insurance, it says.

TD Bank says that next month’s CPI report is “likely to be another big headline-grabber, with both the headline and core rates of inflation set to plunge well below the 2% threshold..”

“Beyond the monthly jumps and wiggles in the data however, the odds are that the underlying inflation picture will remain tame over the course of 2004, with the core rate of inflation remaining below the Bank of Canada’s 2% target,” TD says.”

“While the inflation reading was higher-than-expected, the Bank of Canada will look through this,” Nesbitt says. “The Bank has already projected that inflation will drop back below the target rate in coming months, and stay there into late 2005. The next rate setting date is March 2, by which time we will have January CPI and as a result, this report will not carry much weight.”

CIBC World Markets declares, “Overall, there’s nothing on the inflation front to deter further easing, with a March 2nd rate trimming likely to be followed by further relief in the middle quarters of the year — cuts that will be necessary to place the Canadian dollar on a depreciating track.”