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Inflation rate jumps as impact of declining loonie takes hold

Fruit and vegetables are seen in this file photo.


The Canadian dollar's sharp drop over the past year is beginning to stoke inflation.

The consumer price index rose 2 per cent in January from a year earlier, Statistics Canada said Friday from Ottawa, the highest since November 2014 as the U.S. dollar's gain drives up food costs in Canada.

The jump in prices, which exceeded economist expectations, poses a problem for a central bank that is scrambling to shore up growth with historically low borrowing costs as the country struggles with a plunge in commodity prices. Worries about the impact of the currency kept Governor Stephen Poloz from cutting interest rates last month.

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"All those anecdotes about higher cauliflower prices certainly came through in this report," said David Tulk, chief Canada macro strategist at Toronto Dominion Bank. It "speaks to the concern the Bank of Canada had which probably made them more cautious about cutting rates last month."

Poloz's decision to keep his benchmark rate at 0.5 per cent at a rate decision on Jan. 20 halted a slide in the currency that saw the Canadian dollar fall to a 13-year low.

The depreciation sparked a wave of on-line discussions and news stories, with the price of cauliflower – which jumped to more than $7 – a lightning rod.

Fresh Vegetables

Food costs rose 4 per cent in January from a year earlier, including an 18.2 per cent surge in fresh vegetables and a 12.9 per cent rise in fresh fruit. Most of Canada's fresh produce is imported through the winter and the cost reflects a decline in Canada's dollar against U.S. currency.

The central bank has argued much of the "pass-through" effect from the weaker dollar will be temporary. A 5 per cent gain in the Canadian dollar since the rate decision will also help ease worries, Tulk said.

"It's probably transitory just given what the currency has done since," Tulk said.

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Inflation in January rose from 1.6 per cent in the prior month.

Transportation costs were the other major contributor to faster inflation, rising 2.2 per cent in January compared to a 0.6 per cent pace in December. Gasoline costs increased 2.1 per cent, the first gain since October 2014.

Clothing and footwear was the only major category where prices declined in January with a 0.3 per cent drop.

On a monthly basis, total inflation advanced 0.2 per cent in January and the core rate rose 0.3 per cent. Economists surveyed by Bloomberg predicted that overall monthly prices would little changed and the core rate would gain 0.2 per cent.

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