Gasoline prices fuel February spike in inflation

Canada's beleaguered consumers received a double dose of unsettling economic news Wednesday: Inflation took an unexpected leap upward, while wage growth continued to slow.

Statistics Canada reported that the consumer price index was up 1.2 per cent in February from a year earlier – sharply higher than the 0.5-per-cent pace in January. The CPI in February were also up 1.2 per cent from January – the biggest single-month surge in consumer prices in more than 20 years. The sudden and surprising jump was led by an 8.4-per-cent spike in gasoline prices, but also included significant increases in apparel, transportation and utilities costs.

So-called "core" CPI inflation, which excludes the volatile food and energy components, was up 1.1 per cent year-over-year, and 0.9 per cent for the month.

Meanwhile, Statscan also reported that weekly average earnings for Canadians were up 2.7 per cent in January from a year earlier – down slightly from the December reading, and matching their slowest pace in eight months.

While the prospect of a sudden resurgence in inflation, in the face of stubbornly sluggish wage growth, is not one many Canadians relish, economists cautioned against reading too much into the latest numbers. They noted that inflation and wage growth tend to trend in the same direction, and that the trend in both over the past several months has generally been weak – and is likely to stay that way over several months. Inflation, despite February's surge, is unlikely to run away from wage growth, they said.

CIBC World Markets chief economist Avery Shenfeld noted that recent CPI readings were "unusually low," and in retrospect look to have been anomalies that may have understated the true inflation picture. "There's a lot of noise in the inflation numbers from month to month," he said. "This is really just a return to trend."

"This [1.2-per-cent inflation rate] looks more normal, given the [underlying economic] conditions," said Eric Lascelles, chief economist at RBC Global Asset Management.

Wage growth and inflation tend to move in tandem because changes in one typically affect the other. Rising wages both fuel costs for producers who pass those along to consumers, and they provide consumers with greater disposable income that fuels consumer demand that in turn sparks higher prices.

Mr. Lascelles noted that the weakness in weekly earnings growth was for January – a month when inflation also moved downward. Another Statistics Canada indicator of wages – hourly wage rates, which are compiled as part of the closely followed labour force survey released shortly after the end of each month – showed an acceleration of their growth pace in February, to 2.2 per cent year-over-year from 2.0 per cent in January, displaying a trend more consistent with the February inflation rise.

Still, the growth rate of both weekly earnings and hourly wages is more than a full percentage point below where it stood in mid-2012. That cooling of wage growth, economists said, is a big reason why February's inflation jump is unlikely to be the start of a sustained upward trend.

"While we may have a few more months where we move closer to the normal trend of 2-per-cent inflation, it's hard to imagine any sustained inflationary pressure when wages are this soft," Mr. Shenfeld said.

And in the bigger picture, Mr. Lascelles stressed, wage growth isn't falling behind inflation. "Right now, workers are enjoying real wage growth of about 1 per cent over inflation. That's about normal."