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Canadian Inflation, Retail Sales Advances Show Firming Recovery

Canada’s consumer prices advanced at the fastest pace in two years last month, and retail sales rose for a fourth month in September, suggesting the recovery in the U.S.’s largest trading partner may be quickening.

The consumer price index increased 2.4 percent in October after a 1.9 percent gain in September, Statistics Canada said. The core inflation rate, which excludes eight volatile items such as gasoline, quickened to 1.8 percent from 1.5 percent. Retail sales advanced 0.6 percent, the fourth straight increase.

“The overall theme from the inflation and retail sales numbers suggest the economy did see a bit of re-acceleration in the late summer and early fall,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. “It looks like things have stabilized and even begun to pick up a little bit.”

The Bank of Canada last month lowered its economic growth forecast for the next five quarters and paused interest-rate increases after three earlier moves, amid signs household spending and U.S. growth was moderating. The central bank also predicted that output growth would quicken to a 2.6 percent annualized pace between October and December from a 1.6 percent third-quarter rate.

The Canadian dollar fell 0.2 percent to C$1.0207 per U.S. dollar at 9:43 a.m. in Toronto, compared with C$1.0187 yesterday. One Canadian dollar buys 97.95 U.S. cents.

Yields on Canadian two-year bonds advanced 2 basis points, or 0.02 percentage point, to 1.62 percent. The difference in yields between Canadian and U.S. two-year bonds widened to 1.18 percentage points, the most since January 2004, according to Bloomberg data.

Interest Rate Odds

The odds of a quarter-point interest rate increase at the Bank of Canada’s next decision on Dec. 7 increased to 16 percent from 12 percent yesterday, according to a Credit Suisse Group AG calculation.

The Bank of Canada projected inflation will average 2.1 percent in the October-December period, and core prices will advance 1.6 percent.

Economists forecast inflation would be 2.2 percent in October and the core rate 1.5 percent, according to the median of 23 estimates in a Bloomberg News survey. The maximum forecast for overall inflation was 2.3 percent.

They had forecast a 0.7 percent increase in retail sales, according to the median of 22 estimates. Sales increased in eight of 11 categories tracked by Statistics Canada, including a 1.2 percent increase for automobile and parts dealers.

Gasoline Prices

Gasoline prices accounted for about half the increase in the annual inflation rate, gaining 8.8 percent in October from a year earlier, Statistics Canada said. Overall energy prices advanced 9.1 percent on the year as natural gas rose 11 percent and electricity by 8.1 percent.

Passenger vehicle prices rose 4.9 percent, as did homeowner replacement costs, while property taxes increased 3.5 percent, the agency said in its report.

The Bank of Canada also said last month that sales tax increases in Ontario, British Columbia and Nova Scotia will quicken inflation by 0.7 percentage point from July to June 2011.

On a monthly basis, overall consumer prices rose 0.4 percent in October after a 0.2 percent gain the previous month. The core rate also advanced by 0.4 percent in October, the fastest since February. Economists predicted that monthly prices would rise 0.2 percent, and the core rate would increase 0.1 percent.

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