A gas pump is shown at a filling station in Montreal on April 12, 2017. The federal carbon tax is designed to lower the country's carbon emissions so Canada can meet the reduction targets it agreed to at the Paris climate summit. (Graham Hughes/THE CANADIAN PRESS)

Gas prices, Ontario minimum wage hike help propel annual inflation

Canada’s annual inflation rate crept up higher to hit 2.3 per cent in March but the increase was not as steep as expected by most economists.

The March figures from Statistics Canada show inflation hovering just above the Bank of Canada’s 2 per cent target.

By comparison, inflation was 2.2 per cent in February and 1.7 per cent in January.

The annual pace of inflation was the highest since it hit 2.4 per cent in October 2014, just as the oil-price slump was getting underway.

“While on the surface that might look like cause for central bankers to accelerate the pace of rate hikes, the numbers are being buoyed by the effects of higher minimum wages in some provinces and the recent run-up in oil prices, neither of which are signposts of an economy at risk of overheating,” said Royce Mendes, director and senior economist with CIBC World Markets.

Consumer prices increased in seven of eight major components (Source: Statistics Canada)

Rising oil prices have been a major contributor to the hotter inflation readings of late, Mendes said in a research note to clients.

“Gas prices are up more than 17 per cent nationally over the past year. As a result, after stripping out food and energy, prices are rising at a cooler 2-per-cent pace,” Mendes wrote. “Similarly, the average of the Bank of Canada’s three core measures suggests that inflation is trending right at the central bank’s 2 per cent target.”

The Bank of Canada scrutinizes inflation when it considers interest-rate decisions. Its rate hikes can be used as a tool to help prevent inflation from climbing too high.

But the recent readings above two per cent are unlikely to have a major impact on upcoming interest-rate decisions — because the central bank is now expecting them.

“Headline inflation is likely to accelerate further over the remainder of the year,” Mendes said. “However, with part of that due to the transitory effects of higher gas prices and minimum wage hikes, we see little reason for the Bank of Canada to react aggressively to the slight overshoot.”

Earlier this week, the central bank said that due to the temporary effects of higher gas prices and minimum wage increases it has raised its inflation projections. The bank is now expecting the measure to average 2.3 per cent in 2018 before settling back down to 2.1 per cent in 2019.

With files from The Canadian Press

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