Canadian inflation soared in October, growing faster than economists had predicted. Still, they say that the report was surprisingly encouraging.

“Though widely expected to shoot up, Canada’s inflation rate rose even more than expected in October,” says Bank of Montreal, noting that the consumer price index jumped 0.3% in the month, pushing the annual rate to 3.2% from 2.3% in September. “This, the highest inflation rate since June 2001, compares with a 1.9% rate in October 2001,” observes BMO.

“The sudden rise in the inflation rate is due to a tough comparison with a year ago, when prices fell sharply in the wake of Sept. 11, and was well-anticipated by the Bank of Canada,” comments BMO Nesbitt Burns. “Inflation should start receding in earnest by the turn of the year.”

Nesbitt notes that most of the upward surprise in the latest monthly increase was caused by an 18.5% spike in natural gas prices. “Core inflation was much better behaved, with CPIX flat on the month and the annual rate holding steady at 2.5% — a lower-than-expected result.” Also, auto insurance premiums rose 3.1% in the month, and this month also reported the 2002 property tax increase of 2.2%.

TD Bank agrees that the report is a bit misleading. “This morning’s Canadian consumer price report may have been a bit of an eye-popper, but make no mistake about it — the apparent spike in inflation that was revealed for October was all smoke and mirrors.”

CIBC World Markets also plays soothsayer, observing, “Forget the headlines, a hefty jump in Canada’s year-over-year inflation rate is nothing to fret about.” It says that core inflation trends were surprisingly calm. “With electricity holding back prices, core inflation should re-attain the Bank’s 2% target rate much sooner than earlier anticipated‹honing in on that level early in 2003.”

“If this month’s reading on headline inflation may have raised some eyebrows, the November result will really leave heads spinning,” says TD. “The all-items CPI is likely to clock in at a 4% year-over-year rate in November, with the same year-end 2001 decreases in consumer prices coming into play, but on an even larger scale. Moreover, the core inflation result is likely to edge higher to 2.8% — a hair from the ceiling of the Bank of Canada’s target band. And, if all of this were not enough to confuse all but the most savvy of observers, both the all-items and core indices will be pushed dramatically lower in December if, as announced, the Ontario government goes ahead with its electricity bill rebates — which will be treated as a price drop by Statistics Canada.”