Canada's annual inflation rate came in higher than expected for February, possibly pointing to future interest rate hikes by Canada's central bank.

The 12-month rise in consumer prices was 1.6 per cent for the month, Statistics Canada said Friday. That's less than the 1.9 per cent rate in January, but still higher than the 1.4 per cent rate economists had been expecting.

The February rise in prices was driven by higher gasoline costs for the fourth consecutive month.

The prices Canadians paid at the gasoline pumps were 15.3 per cent higher than they were in February 2009. That followed a 23.9 per cent rise in the 12 months to January.

In February, higher prices for passenger vehicles also put upward pressure on the inflation rate for a second consecutive month.

Core rate higher

The 12-month core rate of inflation — which factors out some of the most volatile components — came in at 2.1 per cent, above the 1.7 per cent increase that economists had been forecasting.

The February increase was the first time in a year that core inflation has topped two per cent in a year.

The two per cent threshold is key as that is the Bank of Canada's stated target for the core rate. "Core CPI is running far above levels in Q1 that the Bank of Canada expected just two months ago," BMO economist Doug Porter said.

But the spike in the core rate came with a caveat, Porter said: travel services soared an off-the-charts 17.9 per cent as hotel rates spiked due to the Olympics during the month.

"This category alone accounted for almost all of the high-side surprise in core CPI in the month," Porter noted, so he expects the core rate to remain below the central bank's two per cent target once the impact of that is negated.

The central bank is expected to begin boosting interest rates by the middle of this year after keeping rates extremely low to help the economy through the recession.

In the wake of the inflation report, the Canadian dollar was up as high as 99.26 cents US as the possibility of higher Canadian interest rates lured investors to the loonie. But by noon ET, the gains were lost, and the loonie was trading at 98.3 cents US, down 0.35 of a cent.