(Updates with swap, bond rates in seventh paragraph, analyst comment in eighth paragraph.)
Oct. 21 (Bloomberg) -- Canada’s annual inflation rate unexpectedly accelerated in September, and a measure of price increases that factors out volatile items reached the highest in almost three years, led by higher costs for clothing, cars and air travel.
The consumer price index increased 3.2 percent in September from a year earlier, compared with an August pace of 3.1 percent and a May peak of 3.7 percent, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News predicted a 3.1 percent reading according to the median of 25 estimates.
The core inflation rate, which excludes eight volatile items such as gasoline, accelerated to 2.2 percent, up from August’s 1.9 percent pace to reach the fastest rate since December 2008. Economists forecast 2 percent core inflation.
While inflation has been above the Bank of Canada’s 2 percent target for 10 months, Governor Mark Carney has said he has “considerable flexibility” in how fast inflation returns to the bank’s desired rate, as the country faces a weak U.S. recovery and uncertainty over the European debt crisis that could tip the global economy into another recession.
“The bank is looking through near-term volatility in inflation,” said Derek Holt, Scotia Capital’s vice president of economics in Toronto, describing the central bank as having a “growth bias” right now.
Canada’s dollar erased losses against its U.S. counterpart following the report. The currency traded at C$1.0102 per U.S. dollar at 8:23 a.m. in Toronto, up 0.5 percent from 1.0154 yesterday. One Canadian dollar buys 98.99 U.S. cents.
Investors pared bets the central bank’s next move will be a cut. The three-month overnight index swap rate, which is based on what investors expect the central bank’s rate will average during that period, rose as 0.9753 percent, from 0.9635 yesterday. Yields on Canadian government two-year bonds rose to 1.07 percent from 1.04 percent.
“While this result doesn’t completely rule out Bank of Canada rate cuts, it relegates them to only the most extreme circumstance,” Doug Porter, deputy chief economist at Bank of Montreal’s Capital Markets unit, said in a note to investors. It may also return the central bank “to the tightening wheel sooner than most now expect” if core inflation stays close to current levels or rises further, Porter said.
Carney, who has kept his benchmark rate at 1 percent for 12 months, has said he may extend a period of low interest rates beyond when full output is restored.
Clothing and Tuition
During the month of September, the cost of women’s clothing jumped 10.5 percent, tuition fees recorded a 4.2 percent gain, air travel prices increased 3.6 percent and car prices were up 1.9 percent, Statistics Canada said.
Gasoline prices rose 22.7 percent in September from a year earlier, Statistics Canada said today.
Canada’s average annual inflation was 3 percent from July through September, compared with a Bank of Canada forecast of 2.8 percent. According to the July 20 outlook, the central bank projects inflation will slow to 2.6 percent in the last three months of this year. The bank will issue new forecasts Oct. 26.
The Bank of Canada runs monetary policy with a goal of achieving a 2 percent annual inflation rate, the mid-point of a 1 percent to 3 percent target range.
On a monthly basis, overall consumer prices rose 0.2 percent in September from August. The core measure rose 0.5 percent. Economists surveyed by Bloomberg predicted monthly inflation of 0.2 percent for both measures.
--Editors: Paul Badertscher, Kevin Costelloe
To contact the reporter on this story: Theophilos Argitis in Ottawa at firstname.lastname@example.org
To contact the editors responsible for this story: David Scanlan at email@example.com; Chris Wellisz at firstname.lastname@example.org