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Canada’s inflation rate rebounded in January on rising gasoline prices, setting the stage for several months of volatile inflation that could trend as high as 3 per cent as current energy prices are compared with rock-bottom prices in March and April of last year.

The consumer price index (CPI) rose 1 per cent year over year, compared with 0.7 per cent in December, Statistics Canada reported Wednesday. That came in slightly ahead of analyst forecasts of 0.9 per cent.

The biggest driver was gas prices, which were up 6.1 per cent in January compared with the previous month, as oil production cuts by Saudi Arabia early in January helped boost global prices. Still, gas prices are 3.3 per cent lower than a year before.

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Economists expect energy prices to boost inflation in the coming months, as current prices are compared with prices last spring, when severe lockdowns led to a collapse in the price of oil. Benchmark West Texas Intermediate crude traded at less than US$20 for much of April last year, but WTI is now approaching US$60.

“The solid rise in January prices sets the stage for what promises to be a significant run-up in headline inflation over the next three months. Depending on what unfolds in the next few weeks for energy costs, overall inflation could easily test the 3 per cent threshold by April, before easing,” Bank of Montreal chief economist Douglas Porter wrote in a note.

Two of the three core inflation measures favoured by the Bank of Canada edged higher in January, although one of these measures was revised downward for December. The average of the three measures, which aim to remove volatile elements of the CPI, was 1.5 per cent.

“None of these figures are particularly high, nor worrisome, on a standalone basis. However, they are a bit higher than expected, and come at a time when there is already rising sensitivity to any signs of higher inflation,” Mr. Porter wrote.

Other drivers of CPI inflation in January included a 2.9-per-per cent increase in new vehicle prices, compared with last year, which Statscan attributed to a “higher availability of new model-year vehicles.”

Food price inflation moderated in January compared to December. The price of meat increased 1.2 per cent year over year and the price of vegetables edged up 0.2 per cent.

The Bank of Canada expects inflation to be volatile in the coming months, with gas prices providing a short-term boost that may moderate in the second half of the year. The bank’s January monetary policy report said it did not expect inflation to return sustainably to its 2-per-cent target until 2023.

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While bond traders are watching inflation closely for hints of when the central bank might begin slowing its pace of buying government bonds, there was little market reaction to Wednesday’s numbers.

“The upside surprise on Canadian CPI may add a bit of fuel to the reflation trade,” TD Securities chief Canada strategist Andrew Kelvin wrote in a note, referring to trade strategies that assume interest rates will increase.

“But with core CPI still well below 2 per cent we strongly doubt that the BoC is nervous about inflation at this point. Persistent economic slack suggests that decisions around tapering will be principally determined by the course of real activity data over the next three to six months.”

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