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A man pumps gas at Petro-Canada station in Toronto in this file photo.

MARK BLINCH/REUTERS

Canada's annual inflation rate unexpectedly spiked to 2.4 per cent in October, matching its highest pace since early 2012 and jumping above the Bank of Canada's inflation target, as falling fuel costs were trumped by higher prices across a broad range of other consumer products.

Statistics Canada said prices rose 0.1 per cent month over month, on a seasonally adjusted basis. It said that despite a 4-per-cent drop in gasoline prices, overall inflation was driven upward by higher costs for clothing, footwear, alcohol and tobacco. Prices in seven of the eight major components of the Consumer Price Index (CPI) were up from September, while all eight components were higher on a year-over-year basis.

The Bank of Canada's closely watched core prices, which exclude the most volatile components of total CPI including energy and many food products, rose 0.2 per cent in the month and 2.3 per cent year over year, topping September's rate of 2.1 per cent and matching its fastest pace since the end of 2008.

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Economists had expected a slight pullback in Canadian prices in the month, largely driven by the falling gasoline prices. They thought the year-over-year inflation rate would be up only slightly, to 2.1 per cent from September's 2.0 per cent. They had anticipated that the core rate would hold steady.

"Inflation isn't so soft after all," said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, in a research note.

While Canadian inflation rose rapidly in the first half of this year, the Bank of Canada has consistently argued that the increase has been due to a series of temporary factors, including last year's Canadian-dollar declines, higher energy prices early in the year, and short-term spikes in meat and telecommunications prices. It believes Canada's economy still has considerable excess capacity, which suggests the underlying conditions for sustained inflation pressures aren't in place.

The bank's view seemed to be borne out in recent months, as the inflation rate peaked at 2.4 per cent in June but declined in the months that followed, slipping by September to 2.0 per cent, the central bank's official target rate for inflation. The resurgence in October, in spite of gasoline's high-profile drop, may suggest that underlying inflation pressures are building beyond the transitory factors that the Bank of Canada has identified.

"Recent months [in the core rate] are tacking on 0.2-per-cent gains seasonally adjusted, which gives less comfort that core pressures are as temporary as the Bank of Canada believes," Mr. Shenfeld said.

Canada's surprising inflation data come on the heels of a higher-than-expected U.S. October inflation report, released Thursday. U.S. CPI was unchanged in the month and up 1.7 per cent from a year earlier. However, the U.S. core inflation measure – excluding food and energy – was up 0.2 per cent in the month and up 1.8 per cent year over year, slightly higher than in September and higher than economists had anticipated. The rise in core inflation was taken as a sign that the sharp decline in fuel prices wasn't having a significant impact on inflationary pressures in the broader U.S. economy, where jobs and demand have been accelerating.

Statscan noted that despite the drop in gasoline prices from September, they were actually up from a year earlier. Prices at the pump had an even bigger decline in October of 2013 than they did this year, tumbling 5.1 per cent.

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Both food and shelter costs were up 2.8 per cent year over year, Statscan said. Transportation prices (which include fuel, as well as vehicle costs and air travel) were up 1.1 per cent from a year earlier.

"Core inflation could potentially move higher still next month, since prices held flat last November, and will now likely run ahead of the Bank of Canada's 2.1-per-cent year-over-year call for all of Q4," said Robert Kavcic, senior economist at Bank of Montreal, in a note to clients. "While this probably won't change their overall view that underlying price pressures are still muted, they might be watching a bit closer now."

"Our assessment is that the broadening out of inflation pressures is likely to limit how much the core rate moves back down in 2015," said Royal Bank of Canada assistant chief economist Dawn Desjardins in a research note. She added that she also expects the Canadian economy will return to full capacity earlier than the Bank of Canada's projected time frame of the second half of 2016.

"Our view remains that the persistence of core inflation holding near or above the Bank [of Canada]'s target, and a firming in economic growth, will convince the [central] bank to reduce the amount of policy stimulus by raising the overnight rate in the middle of next year," she wrote.

By province, Alberta showed the highest year-over-year inflation, at 3.0 per cent, followed by Ontario at 2.8 per cent. British Columbia's inflation rate was the lowest, at 1.1 per cent, as clothing prices fell in the province last month while the rest of the country saw rising clothing prices. Quebec's inflation rate was 2.2 per cent.

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