The rising price Canadians have been paying at the gasoline pumps helped to push up the country's annual rate of inflation in April for the first time in five months.
Statistics Canada reported Wednesday that the consumer price index rose 1.7 per cent between April 2007 and April 2008, up from a 1.4 per cent increase in March. This was the first acceleration in the overall rate of inflation since November 2007.
The rising inflation rate came as a surprise. Economists had expected the rate to stay at 1.4 per cent.
"While Canada is faring better than most other countries, it appears that the shelter provided by the loonie from surging global commodity prices may be fading," said BMO Capital Markets economist Michael Gregory.
"It seems like the salad days, if you like, of Canadian low inflation may be behind us," he told CBC News.
The Canadian dollar shot up as the market bet that the Bank of Canada might shy away from making any aggressive interest rate cuts. The loonie gained 0.79 of a cent to close at $1.0162 US — its highest close in almost three months.
The higher cost of gasoline was the biggest factor in April's inflation increase. Gas prices rose by six per cent from March and were up 11.6 per cent in the last year.
Fewer incentives being offered by car manufacturers in April were also a factor in the rising inflation rate. Statistics Canada said the price of passenger vehicles fell 6.6 per cent in April 2008 compared with the same month of the previous year, a smaller drop than the 7.1 per cent decline in March.
Other factors putting upward pressure on the inflation rates included mortgage interest costs, fuel oil, home maintenance costs and baked goods.
Prices for fresh vegetables eased in April. Statistics Canada said fresh vegetable prices were relatively higher at this period last year when supplies were hit by a frost in California. The rise of the Canadian dollar also helped lower prices of imported vegetables.
Highest increases in Alberta, Saskatchewan
Lower prices were also seen for women's clothing and computer equipment.
The 12-month change in the Bank of Canada's core rate of inflation rose to 1.5 per cent in April, faster than the 1.3 per cent increase in March. The core rate excludes fruit, vegetables, mortgage interest costs, tobacco, intercity transportation, natural gas, fuel oil and gasoline.
Across the country, Alberta and Saskatchewan recorded CPI increases of 3.2 per cent, which were the highest of all provinces. The increases were mainly because of higher new housing costs.
Despite April's rise in inflation, many economists don't see the Bank of Canada radically shifting its stance on interest rates.
"In the medium-term, the [Bank of Canada] will most likely stay focused on the fate of Canadian exports and credit conditions, which pose significant risks to the downside," said TD Bank economist Pascal Gauthier.
"Admittedly, while the latest inflation figures do not cast doubt over whether the [Bank of Canada] will ease interest rates further at their next meeting [June 10], it does increase the likelihood that the [Bank of Canada] might 'ease the easing' and cut only 25 basis points rather than 50 basis points."
Analysts warned that higher inflation is on the horizon.
"It’s only a rumbling in the distance at this point, but April’s Canadian CPI data are warning of a more troublesome inflation environment in the coming year," said CIBC World Markets senior economist Avery Shenfeld, who forecasts three per cent inflation in 2009.
