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economy lab

Bank of Canada Governor Mark Carney.MIKE CASSESE

The Bank of Canada's nuanced effort to straddle the line between acknowledging that inflation has been firm, and hinting that it will act before it creeps up much further, while asserting that it reserves the right to delay action as long as the global backdrop is shaky, appears to be working in holding expectations steady.

Inflation accelerated last month, Statistics Canada figures showed today, but analysts on Bay Street were almost universal in declaring that the April numbers will do little to sway policy makers one way or the other. That's largely because of alarming signs that the euro crisis may get much worse again before it gets better. It's also because of evidence that while the inflation picture is evolving much like Bank of Canada Governor Mark Carney's mid-April forecast said it would, his estimates for economic growth are looking too optimistic.

"While inflation surprised modestly to the upside, this is nothing to get excited about," wrote Derek Holt and Dov Zigler of Scotia Capital. "Growth is sharply disappointing (Bank of Canada) expectations."

That may be an overstatement. True, inflation picked up modestly, to an annual rate of 2 per cent, bang-on Mr. Carney's target, from 1.9 per cent in March. And the core rate, which strips out volatile items like energy and some fresh foods, accelerated but just to an annual pace of 2.1 per cent. Hardly runaway price gains. And based on the fact that gross domestic product shrank unexpectedly in February, it's clear that Mr. Carney will miss his first-quarter growth estimates, which are integral to his sense that economic slack was disappearing quickly enough to consider rate hikes.

More recent indicators suggest that unless Europe's troubles once again escalate into something that threatens the global recovery, there is underlying strength and momentum in Canada. That suggests the economy could withstand an interest-rate increase if, say, Mr. Carney decided that one or two before the end of the year was the only way to address the household debt problem that he considers the main domestic risk. Still, most economists remain of the view that Mr. Carney will sit tight for longer, but will continue to hint that he could hike at any time.

"From a strictly domestic perspective, this moderate pick-up in inflation moves the yardsticks a bit further down the field towards rate hikes," wrote Doug Porter of BMO Nesbitt Burns. "Of course, the reality is that the latest flare-up in Europe's debt crisis will overwhelm domestic considerations for the Bank. So, given the recent run of solid domestic indicators–jobs, housing, manufacturing and now prices–look for the Bank to maintain its tough talk, but not to act on it any time soon."

One way to interpret all this is that Mr. Carney's "trust me" approach to inflation targeting has been a success. Markets and economists are giving him leeway to take a flexible approach without questioning whether he's losing his focus. (Inflation is tracking right around where the bank had projected, but nobody is screaming from the rooftops for a rush into hiking rates to keep it from getting out of hand.)

Most Canadians don't care much about any of that, of course. What matters to them is the price gains themselves.

In April, energy costs rose at a slower annual rate than the overall consumer price index for the first time since October, 2009, but that was mostly because prices were so high at this time last year as the early stages of regime-changing turmoil in the Middle East drove up oil. Gasoline prices saw their smallest year-over-year increase since September, 2010. Nonetheless, transportation costs were up 3.2 per cent, including a 3.4-per cent gain in car prices, Statscan said. Clothing and footwear prices were 2.4 per cent higher than a year ago, while food costs rose 2.5 per cent.

A lot of that could be one-time gains (new clothing lines for spring and summer, for instance, and higher restaurant prices as the beginning of patio season draws crowds). Indeed, in terms of the Bank of Canada, the greater risk might be that inflation cools considerably but Mr. Carney raises rates this year anyway, to tame household borrowing.

But as long as the external climate threatens to stall or reverse recent gains in Canada's economy, Mr. Carney will continue to sound as if rate hikes could be around the corner, while tolerating slight upticks in inflation until things are more settled. And unlike last summer, the critics seem to be OK with that.