Inflation increase surprises economists

Core inflation was sharply higher than expected in November, making it less likely that the Bank of Canada will emulate its U.S. counterpart and chop interest rates to zero, economists say.

The central bank's index of core inflation, which excludes volatile items such as gasoline and other energy products and some food items - fruits and vegetables - unexpectedly rose 2.4 per cent over the 12 months to November, Statistics Canada said yesterday, drawing exclamations of "staggering" and "a shocker" from several economists.

This was a much sharper jump than the October-to-October showing of 1.7 per cent, and much higher than the 1.6 per cent economists had, on average, been forecasting for November.

The jump came as the falling Canadian dollar forced prices up on most items included in the core rate calculations.

"The major mover here was a 7.2-per-cent monthly spike in auto prices, as annual price adjustments for new vehicles are captured in November, and clearly the weak Canadian dollar made a big impression," Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said in a note to clients.

Mr. Porter said the numbers showed that Canada is much less vulnerable to near-term deflation concerns because of firmer underlying spending conditions and the weaker Canadian dollar.

Overall inflation continued to ease last month, as gasoline prices kept sputtering, with the annual rate falling to 2 per cent from 2.6 per cent in October and 3.4 per cent in September, Statscan said. As well, on a seasonally adjusted basis, consumer prices fell 0.3 per cent from October to November, half the dip experienced between September and October.