Canada inflation jumped to 4.3% in November, from 3.2% in October. The big increase caught economists off guard.

Bank of Montreal notes that the jump from October reflects the fact that sharply lower prices last November were not repeated this year. “In November 2001, prices fell by 0.9% in the month as energy prices declined sharply following the collapse of world demand for oil. Larger-than-usual price discounting after the September 11th attacks also contributed to the drop.” However, prices this November rose 0.2% in the month. The large difference in monthly changes accounts for the rise in the year-over-year rate from October.

Core inflation, as measured by the Bank of Canada, rose 3.1%, compared to a 2.5% rate in October. “Since most energy components (with the exception of electricity) are excluded, the swing in energy prices since last November is not a factor in the core rate rise. However, last November core prices did fall 0.3% reflecting sharper-than-usual discounting after September 11. This November core prices rose 0.2%,” notes BMO. It says that auto insurance is a key factor behind this gain, accounting for over half of the monthly rise and almost 1% of the year-over-year rise.

“Markets were expecting an ugly headline reading on Canada’s inflation rate for November, but not quite this ugly,” says BMO Nesbitt Burns. “Despite the latest frothy reading, inflation is still poised to drop significantly to closer to 2% over the next six months, as some big readings earlier this year fall out of the index. As well, Ontario’s rollback of electricity prices will push both headline and core inflation sharply lower next month.”

“As with the outlook for Canadian employment gains and overall GDP growth, it’s downhill from here for consumer price inflation,” agrees CIBC World Markets. “Ontario electricity rebates are now arriving in mailboxes, which are likely to hold both total and core CPI half a point below where they otherwise would have been in December. We continue to look for both total and core CPI to trend lower through the first half of 2003, in line with a general easing in economic growth. By next summer, year-over-year inflation should once again be hovering around the mid-point of the Bank of Canada’s 1%-3% target band.”

Nesbitt says that this CPI report will keep the Bank talking tough, and a spring tightening is still possible.

But CIBC is more sanguine, it says this report has not materially changed its outlook for the Bank of Canada. “Risks to the growth outlook are real enough to keep Dodge and Company on the sides through 2003.”

RBC Financial Group economists agrees that the CPI should not motivate the Bank to raise interest rate over the near term. “