(Bloomberg) -- Canadian inflation unexpectedly accelerated on a surge in airfares last month, but underlying price pressures remained steady.

The consumer price index in December recorded a 2 percent gain from a year ago, up from 1.7 percent in November, driven by a 22 percent surge last month in the cost of air transportation. Economists had been expected inflation to be unchanged at 1.7 percent. Core measures of inflation -- seen as a better gauge of pressures -- were unchanged at about 1.9 percent.

The unexpected pick-up to end the year may raise some doubt about the Bank of Canada’s forecasts that inflation will temporarily taper off in the first half of this year. And there are some signs of pressures outside the core measures.

Inflation in the services sector hit 3.5 percent in December, the highest since August 2008. Excluding gasoline, consumer price inflation hit 2.5 percent, the fastest since 2014.

Still, policy makers tend to look more closely at the core figures and those have stayed steady at near 2 percent for more than a year. Statistics Canada also said to treat the jump in air transportation costs with caution after a change in how it’s calculated.

A core rate at near 2 percent is consistent with an economy at full capacity -- but not one that is overheating. This gives the Bank of Canada scope to proceed with caution on further interest-rate increases, as it has been indicating.

Inflation in the fourth quarter averaged 2 percent, in line with the Bank of Canada’s latest projections released last week. The central bank forecasts inflation will average 1.7 percent in the first quarter and slow further by the middle part of the year before accelerating back to 2 percent by the end of 2019.

Overall, 2018 saw inflation finish above the central bank’s target for the first time in seven years -- averaging 2.3 percent last year from 1.6 percent in 2017.

Other Details

  • Gasoline prices continued to be the largest downward driver to inflation, falling 6.5 percent on the month.
  • On a monthly basis, the consumer price index was down 0.1 percent, versus economist expectations for a 0.4 percent decline
  • On a seasonally adjusted basis, the index rose 0.2 percent
  • All three measures of core inflation were unchanged in December. The “common” rate was at 1.9 percent, the “median” at 1.8 percent and the “trim” rate at 1.9 percent from a revised 2.0 percent

--With assistance from Erik Hertzberg.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Greg Quinn

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