Inflation suggests rate hike is likely

January increase was the reading’s highest mark since late 2016

OTTAWA— The annual pace of inflation cooled to 1.7 per cent last month — but rising prices underneath the turbulence of this headline number suggest the Bank of Canada is unlikely to veer from its interest-rate hiking path.

A new Statistics Canada report Friday showed the average of three core inflation measures, designed to filter out the noise of more volatile items such as energy prices, advanced once again in January to hit 1.8 per cent. It represented the reading’s highest mark since September 2016.

Average core inflation has been on a steady monthly climb since it fell to 1.3 per cent in May 2017. The movement suggests underlying consumer prices have been creeping higher along with Canada’s recent economic strength. The upward momentum of underlying prices is an important piece of data because it’s certain to catch the attention of the inflation-targeting Bank of Canada, analysts said Friday.

Since the bank’s inflation bull’s-eye is 2 per cent, the latest reading reinforced experts’ expectations that Bank of Canada governor Stephen Poloz will continue to gradually raise the trend-setting interest rate. He’s already hiked the rate three times since last summer.

Central banks can boost their benchmark rates as a way to slow the march of inflation.

“They’re very data dependent and . . . potentially, we could have more rate hikes in order to keep inflation close to that 2-per-cent mark,” said James Marple, senior economist for TD Bank, about the Bank of Canada. “We’re basically there now.”

Poloz’s next rate announcement is set for March 7. The Bank of Canada has repeatedly stressed it will scrutinize the data when considering rate decisions.

Marple said TD predicts the Bank of Canada’s next rate increase is to come in July, but he noted it a hike could come sooner.

Other experts pointed to the underlying number Friday as another sign the central bank will make more than one more move in 2018.

CIBC’s Royce Mendes said even though core inflationary pressures are “heating up,” he predicts the Bank of Canada to remain cautious. “The Canadian economy is still facing potential headwinds from NAFTA renegotiations, U.S. tax cuts and new mortgage rules,” Mendes wrote in a note to clients.

Overall, Statistics Canada’s headline inflation reading of 1.7 per cent for January was weaker compared with a1.9-per-cent result in December and 2.1 per cent in November.