Economists said the impact on the index of a 22 percent jump in airfares will be temporary and that the Bank of Canada, which has hiked interest rates five times since July 2017, will pay more attention to its three measures of core inflation. They were stable and held below the central bank's target.
"There is no urgency whatsoever for the bank to move," said Doug Porter, chief economist at BMO Capital Markets. "We've been looking for two rate hikes later this year, and I stress the word 'later.' We've got them going in July and December."
Last week, the Bank of Canada held rates steady at 1.75 percent, as expected, but said more increases would be necessary even though low oil prices and a weak housing market will harm the economy in the short term.
Canada is a major exporter of oil, which has fallen as much as 45 percent since October.
The Canadian economy is clawing its way through a soft patch, which will delay the next interest rate hike until at least April, according to economists polled by Reuters.
The chances of another rate hike by April held at less than 20 percent after the inflation data, the overnight index swaps market indicated.
Canada's annual inflation rate rose to 2.0 percent from 1.7 percent in November as rising air transportation and telephone service costs offset lower energy prices, Statistics Canada said on Friday. The median prediction of analysts was for annual inflation of 1.7 percent.
"I wouldn't read too much into it," said Andrew Kelvin, senior rates strategist at TD Securities. "There was a big boost from air travel again, so that's something we would expect to unwind in the coming months. What's more important is that the core inflation metrics were stable and we did have a bit of a downward revision to the median core CPI metric."
The CPI-median was unchanged at 1.8 percent after a downward revision in November, which had previously been 1.9 percent. The Bank of Canada's two other preferred measures of core inflation, CPI-common and CPI-trim, were stable at 1.9 percent.
The Canadian dollar
Canada's 10-year
Separately, Statistics Canada said foreign investors bought C$9.5 billion ($7.2 billion) in Canadian securities in November, mainly in bonds. Meanwhile, Canadian investors sold C$4.1 billion worth in foreign securities, led by U.S. shares. This was the largest divestment in a year.
(Reporting by Dale Smith in Ottawa and Fergal Smith, Nichola Saminather and John Tilak in Toronto; Editing by Susan Thomas and Jeffrey Benkoe)
By Fergal Smith and Dale Smith
