Inflation cools but underlying rate continues to heat up

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 like 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 in- flation-targeting Bank of Canada, analysts said Friday.

Since the bank’s inflation bull’seye is two per cent, the latest reading reinforced experts’ expectations that Bank of Canada governor Stephen Poloz will continue to gradually raise the trendsetting 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 two per cent mark,” James Marple, senior economist for TD Bank, said of 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 future rate decisions.

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