It's a gas, gas, gas!

Canada's headline consumer price index slowed sharply in January, with the year-on-year rise slipping to 1.4 percent from 2.0 percent in December. However, every index except the headline reveals that inflation remains very close to the Bank of Canada's 2 percent target, so the data have no implications for Bank of Canada policy.

The fall in headline CPI in January was solely driven by weak energy prices, which fell 7 percent from a year earlier.  Most notably, gasoline prices were fully 14 percent lower than the year before, a direct result of overproduction by US refiners. If gasoline prices are taken out of the index, the yearly rise in CPI was 2.1 percent.  All three of the Bank of Canada's preferred measures of core inflation stood just below the 2 percent target in January.  These measures have been remarkably stable for the past several months.

With the underlying inflation rate so stable, fluctuations in gas prices at the local station have proved to be a very reliable indicator of monthly movements in headline CPI.  So, with that in mind.....gas prices have been heading higher for the past several weeks.  At least some of the increase took place before StatsCan's sampling "window" for February.  Ceteris paribus, this suggests that headline CPI will move back toward the 2 percent target level either this month, or at the latest in March.

So long as its preferred measures remain stable, these fluctuations in the headline rate will not trouble the Bank of Canada.  With inflation on target, wages stagnant and the Fed taking a dovish stance, there is no real prospect of any change in Bank policy until the second half of the year.