UPDATE 2-Canada annual inflation jumps to near 2 pct

* Inflation rate jumps to near central bank target

* Gasoline drives CPI higher due to base effects

* Bank of Canada not likely alarmed by data
(Adds market reaction, analysts, details)

By Louise Egan

OTTAWA, Feb 18 (BestGrowthStock) – Higher gasoline prices pushed
Canada’s annual inflation rate to just below the central bank’s
2 percent target in January, but that is not expected to
trigger interest rate hikes before the second half of this
year.

The consumer prices index climbed 0.3 percent in the month,
Statistics Canada said on Thursday. But 12-month inflation sped
past expectations to 1.9 percent from 1.3 percent in December
as prices in the transportation sector rose by the largest
amount since September 2005.

The Canadian dollar firmed following the data, rising to a
session high of C$1.0444, or 95.75 U.S. cents, from C$1.0465,
or 95.56 U.S. cents, just before the data.

Analysts had expected inflation at a slightly lower 1.8
percent but still approaching the Bank of Canada’s target at
the midpoint of a 1-3 percent range.

But they warned against overreacting to such a strong
number at a time of extraordinary monetary stimulus, saying it
reflects the base effects of low fuel prices a year earlier
which could fall out of the equation by mid-2010.

“The minute we touch this (2 percent) number, the bond
market gets nervous, so I will expect the bond market to react
negatively to this number,” said Benjamin Tal, senior economist
at CIBC World Markets.

“However we have to remember that those numbers reflect not
month-over-month change, but rather a year-over-year comparison
which can be misleading given the fact that last year was a
relatively weak number,” he said.

Rising vehicle prices pressured the core rate of inflation,
which strips out gasoline and other volatile items to reflect
underlying price trends, to 2 percent annually after edging up
0.1 percent in the month. Vehicle prices had been exerting
downward pressure on core CPI for much of 2009.

The Bank of Canada has pledged to hold its benchmark
interest rate at a historic low of 0.25 percent until the end
of June as long as inflation does not spin out of control.

“I think it’s far from a situation where the Bank of Canada
is going to be getting alarmed,” said David Watt, senior
currency strategist at RBC Capital.

“The Bank of Canada still sees a lot of slack in the
economy especially on the goods producing and manufacturing
side … Pricing pressures don’t really seem to be developing
all that strongly. The unemployment rate is still elevated
relative to where they would probably get concerned about
inflationary pressure building,” he said.

The bank’s latest forecast is for 12-month CPI to average
1.6 percent in the first quarter of this year, and for 12-month
CPI on both the overall and core basis to reach 2 percent in
the third quarter of 2011.

Stock Market Investing

(Additional reporting by Scott Anderson and Ka Yan Ng in
Toronto, Editing by Chizu Nomiyama)

UPDATE 2-Canada annual inflation jumps to near 2 pct