The pace of inflation picked up in January as the consumer price index rose 1.5% compared with a year ago, its biggest jump since the summer of 2012.
Statistics Canada says the gain compared with a CPI uptick of 1.2% in December, while the Bank of Canada’s core index, which excludes some of the most volatile items, was up 1.4% for January after posting a gain of 1.3% in December.
Economists had expected a gain of 1.3% for both the consumer price index and the central bank’s core index, according to Thomson Reuters.
Eric Lascelles, chief economist at RBC Global Asset Management, says the stronger inflation rate helps put to rest the slim chance of the Bank of Canada lowering interest rates to stimulate growth.
“The bank’s been sitting at a neutral position for a while, but expressing concern about low inflation. You have to think that concern starts to abate now,” Lascelles says.
The Bank of Canada’s recent forecast that inflation will remain below its target of 2% for about two years has raised concern of an economy too weak to push up prices.
“The low inflation concerns are perhaps starting to abate here. They’re not completely gone, but they’re starting to abate and our working assumption is that inflation probably has some further room to run to the upside,” Lascelles says.
The increase in inflation came as Statistics Canada also reported retail sales in December fell more than expected.
Retail sales fell 1.8% from November to $40.2 billion as winter storms kept shoppers at home and out of the malls and off the car lots.
Nine of the 11 subsectors reported lower results with the biggest drop in dollar terms was the motor vehicle and parts subgroup which dropped 3.2% as sales at new car dealers fell 3.6% for the month. Excluding auto sales, retail sales were down 1.4%.
“The decline in sales is consistent with the narrative and early indications of December as very weak month for economic activity,” TD economist Connor McDonald.
“We expect industry level GDP to contract modestly as a result of the lost output from the ice storm and generally inclement weather.”
TD notes that retail sales are likely to recover with the spring thaw and while debt loads remain a limiting factor, consumer spending is expected to remain a key driver for the economy.
Seven of the eight major components of the consumer price index were up from a year ago. In addition to higher shelter costs which increased 2.1% compared with a year ago, a 2% increase in transportation costs and a 1.1% increase in food prices contributed the most to the rise.
Excluding food and energy prices, the consumer price index was up 1.2% compared with a year ago.
Contributing to the higher shelter costs for January were an increase in electricity prices, which were up 4.7% compared with a year ago, while rents climbed 1.6% and home and mortgage insurance costs rose 5.4%. Mortgage interest costs fell 0.6% on a year-over-year basis, the smallest decline since May 2012.
Contributing to the higher transportation costs was a 4.6% rise in gasoline prices. Food prices climbed 1.1% with prices for food from stores up 1% and food in restaurants up 1.3%.
The health and personal care index the only major component to post a decline as it dropped 0.2% compared with a year ago.
BMO senior economist Benjamin Reitzes says the February inflation report will be closely watched because prices rose strongly in February 2013.
“However, January’s bigger-than-expected increase suggests that headline and core inflation won’t fall as low as previously expected,” Reitzes says.
“That will definitely be a relief for policy-makers, though the weak end to 2013 for broader economic activity is a new concern.”
By province, the pace of inflation picked up in six provinces compared with December led by an increase of 2.7% in Alberta compared with a 2.1% gain in December. Inflation slowed in New Brunswick to 1.6% compared with 1.9% in December.
B.C. saw no year-over-change in the consumer price index for the second consecutive month.
On a month-over-month basis, the consumer price index increased 0.3 in January from December before seasonal adjustments, but increased 0.2% from December with seasonal adjustments.