Inflation rate spikes as carbon taxes hit gasoline prices

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Canadian inflation spiked to its highest rate in more than two years in January, as new carbon taxes in Alberta and Ontario fuelled a surge in gasoline prices.

Statistics Canada reported that the consumer price index was up 2.1 per cent year over year in January, the fastest pace since October, 2014, and up sharply from 1.5 per cent in December. It said gasoline prices were up 20.6 per cent from a year earlier, the biggest increase since September, 2011. The increase reflected the introduction of a carbon tax in Alberta and a cap-and-trade carbon pricing system in Ontario, both of which came into effect on Jan. 1, as well as higher crude-oil prices, which lifted fuel costs nationwide.

Excluding gasoline, January's inflation rate was 1.5 per cent, up slightly from 1.4 per cent in December.

While economists had anticipated a rise in January, it was bigger than expected. Their consensus estimate was an inflation rate of 1.6 per cent.

On a seasonally adjusted basis, inflation surged 0.7 per cent month over month in January, the biggest one-month increase since February, 2013, adding to December's 0.4-per-cent rise.

Gasoline prices were up 7.4 per cent month over month, Statscan said.

In Alberta, the annual inflation rate jumped to 2.5 per cent in January from 1 per cent in December, as gasoline prices were up 34 per cent from a year earlier and 7.9 per cent from a month earlier. In Ontario, the inflation rate was 2.3 per cent, up from December's 2 per cent, as the 20-per-cent year-over-year increase in gasoline prices was partly offset by a 3.5-per-cent drop in electricity prices, reflecting a new consumer rebate that took effect Jan. 1.

While the jump in gas prices was the biggest driver of January's CPI spike, year-over-year price gains were generally strong across a broad range of goods, and the pace of inflation rose in five out of eight major categories. Shelter prices were up 2.4 per cent year over year, alcohol and tobacco were up 2.7 per cent, and costs for recreation, education and reading products were up 3.2 per cent.

The only major outlier in the CPI report was food, where prices were down 2.1 per cent year over year. Last winter saw a surge in food prices, particularly for fresh fruits and vegetables, amid a weak Canadian dollar and weather-related seasonal increases in the cost of imported produce.

Economists said generally rising inflation numbers reflect the pickup in Canada's economy over the past six months, although they have been tempered by a generally rising Canadian dollar, which cools costs for imported goods.

The January reading puts inflation slightly above the Bank of Canada's 2-per-cent inflation target, at a time when the central bank is in the midst of its deliberations for next Wednesday's decision on interest rates. But economists noted that despite the jump in the overall inflation rate, the Bank of Canada's new core measures for inflation remain well below the 2-per-cent target.

The three measures, adopted by the central bank late last year, averaged 1.6 per cent in January, unchanged from December.

"This is all the reason [Bank of Canada] Governor [Stephen] Poloz will need to still sound mildly dovish at next week's interest rate decision, even with headline inflation surprising to the high side and moving above 2 per cent," said Bank of Montreal chief economist Douglas Porter in a research note.

The Bank of Canada is widely expected to leave its key interest rate unchanged at 0.5 per cent, where it has been since mid-2015. Economists agreed that the surprise increase in the overall inflation rate is unlikely to sway the central bank.