OTTAWA—Canada's consumer-price index leaped by its biggest monthly increase in two decades, adding Canada to the list of major economies recently pressured by inflation as economic recoveries around the world become more entrenched.
The jump surprised economists and analysts here, many of whom had been comforted by so-far benign inflation pressure across Canada, much of that thanks to a strong Canadian dollar. It also raises the likelihood of an interest-rate increase by the Bank of Canada, the central bank, sooner this year rather than later. Some economists had pushed back their forecast timing of such a hike after the Bank of Canada, which kept rates steady last week, offered a less hawkish tone on future action than many had expected.
Overall CPI rose in March at a 1.1% monthly rate, the quickest clip since January 1991, accelerating from 0.3% the previous month, and lifting the year-on-year pace to 3.3% from 2.2%, Canada's statistics agency said Tuesday. The Bank of Canada targets inflation at the 2% midpoint of a 1% to 3% range.
The core rate—which excludes volatile energy and some food prices—accelerated to 0.7% from 0.2% on a monthly basis, the largest gain since February 2010. The core rate was up 1.7%, from 0.9%, on an annual basis, a level that the Bank of Canada had previously forecast would only be reached in the third quarter of this year.
Earlier this month, the European Central Bank raised its key rate in a move officials said was aimed at keeping inflation across the euro-zone in check. And in China, Beijing officials are struggling to battle inflation, which data showed last week is rising at its fastest clip in three years.
But until now, North America has been relatively unscathed by the threat of rapid price rises. Last week, surging gasoline and food prices drove up U.S. prices. But excluding fuel and food, they remained subdued.
Many economists had been expecting Canada's strong currency to help keep prices in check north of the border. Canada is a big importer of U.S. goods, and a strong Canadian dollar helps keep a lid on imported inflation.
Tuesday's broad-based price surge "raises some serious questions over just how much slack is left in the Canadian economy and just how much of a dampener the Canadian dollar really is on prices," said Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto.
The Canadian dollar, which has recently broken through levels not seen since 2007, moved higher after the inflation data was released, on the expectation that the central bank might move earlier in raising rates.
Forecasts had called for monthly and annual total CPI gains of 0.6% and 2.8%, respectively. The core rate had been expected to increase 0.2% on a monthly basis and 1.2% year-on-year.
"In the past, one could take comfort from the view that although headline inflation would suffer from the impact of higher energy and food prices, the core would remain well behaved. Some of that comfort has been lost today," HSBC Securities (Canada) economist Stewart Hall wrote in a report.
The annual average for the first quarter was higher than the Bank of Canada's latest forecasts from its Monetary Policy Report, published last week. The central bank held its benchmark overnight rate steady at 1% for the fifth consecutive time last week and said any further rate hikes would need to be "carefully considered."
StatsCanada, the statistical agency, said gasoline prices jumped 18.9% year-on-year in March, and the cost of fuel oil and other fuels surged 31.3%. Overall energy prices rose 12.8%. Food prices rose 3.3% as the cost of fresh vegetables jumped 18.6% due to reduced supply caused by bad weather in Mexico and the southern U.S. The cost of food purchased from stores rose 3.7%, the most since August 2009.
Clothing and footwear prices were up 0.9%, the first annual gain since November 2009, as fewer clothing items were discounted compared with a year ago.