Consumer inflation in Canada increased to 5.1% in January, hitting a 31-year peak and likely leaving the Bank of Canada little choice but to hike its overnight rate on March 2.

Rising three basis points from a month earlier, according to Statistics Canada, economists had actually predicted annual inflation would remain flat in January; however, the Bank of Canada’s core measures average increased to 3.2% -- the highest since 1991 and well above the 1.8% average since the bank began the policy in the 1990s.

Inflation has surpassed the central bank’s rate control of 1-3% for 10 consecutive months, with price increases mainly driven by global supply chain backlogs and labour scarcities.

Although the Bank of Canada held its overnight at 0.25% last month, it sent strong signals that it would begin its rate-hiking regime earlier than expected. RBC Bank had initially pegged the central bank to raise its overnight rate by 25 basis points in April, but told STOREYS that March 2 is likelier.

However, some observers, alarmed by the consumer price index (CPI) breaking 5% since the first time since September 1991, have suggested that the Bank of Canada could hike its overnight interest rate by 50% basis points to stem runaway inflation. Governor Tiff Macklem has even himself stated that he’s uncomfortable watching the CPI surge well past the central bank’s 2% target.

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A 50 basis point increase would be a departure from the central bank’s typical policy of 0.25% increases at a time, suggesting that it could have erred in opting not to hike the overnight rate in January.

South of the border, the US inflation rate has reached 7.5%, and because the Bank of Canada typically follows the Federal Reserve’s lead, an interest rate hike appears imminent. Excluding gasoline, inflation rate in Canada has increased by 4.3% from January 2020.

Although real estate prices are excluded from the CPI because homes are considered assets by StatCan, the estimate of how much it would cost homeowners to replace their living arrangements is up by 13.5% year-over-year, erasing the disinflationary effect, which is roughly 6.8% lower, of lower mortgage borrowing costs.

The cost of groceries has increased to 6.5% in January from 5.7% in December, as a consequence of supply shortages, which has caused a spike in shipping costs, StatCan said.

The other main river is gasoline, for which prices rose by 30% year-over-year in January, in part because of fears that Russia could invade Ukraine in what is arguably the region’s most fraught period since the Cold War.