Inflation and Retail Sales Data Show Canada Weakness Lingers

Updated on

Canada’s consumer prices advanced 0.9 percent in May from a year earlier while retail sales for April posted a surprise decline, signs the second-quarter recovery the central bank is counting on remains in doubt.

Core inflation, which excludes eight volatile products, slowed to 2.2 percent from 2.3 percent in April, Statistics Canada said Friday from Ottawa. April retail sales fell 0.1 percent on declines in food and electronics. Economists had expected sales to rise 0.7 percent, according to the median forecast in a Bloomberg News survey.

Total inflation, while exceeding April’s 0.8 percent pace, is still outside the Bank of Canada’s 1 percent to 3 percent target range. The 0.1 percent April decline in retail sales exceeded even the most bearish economist forecast, suggesting economic weakness in the first quarter from lower crude oil prices is lingering into the second.

“The economy is going to remain sluggish,” Doug Porter, chief economist at BMO Capital Markets, said by phone from Toronto. He predicts annualized second-quarter growth of about 0.5 percent. “The bigger surprise was definitely in retail sales.”

The Bank of Canada said in its May 27 interest-rate decision slack in the economy is keeping the “trend” inflation rate between 1.6 percent and 1.8 percent, below a target of 2 percent. Lower energy prices and extreme weather, combined with stagnant global demand, is keeping a lid on the nation’s economic growth.

Negative Hand-Off

“The hand-off is clearly a negative one,” Governor Stephen Poloz told reporters after the May rate decision, saying the effects of the “horrible winter that we had didn’t end on March 31.”

Policy makers are counting on a rebound in non-energy exports in the second quarter to boost growth. Energy prices fell 11.8 percent in May from a year ago, less than the April decline of 13.5 percent, Statistics Canada said.

Food prices rose 3.8 percent, led by a 7.9 percent gain for meat. Prices for recreation, education and reading products rose 1.9 percent.

The inflation readings exceeded median economist forecasts in Bloomberg surveys, which called for total inflation to rise 0.8 percent and core to increase 2.1 percent.

Canada’s dollar remained lower after the report, and was down 0.3 percent at C$1.2254 per U.S. dollar at 9:47 a.m. Toronto time. The currency has depreciated 5.4 percent this year partly on bets Poloz may cut rates again after his January reduction. Porter said another cut is unlikely as long as the U.S. Federal Reserve signals it may raise rates.

Poloz has said lower energy prices are holding down total inflation while core prices are boosted by a weaker Canadian dollar and pressures in specific industries such as meat production.

The central bank’s April forecast was for total inflation to average 0.8 percent in the second quarter, and core prices to advance 2.1 percent. The Bank of Canada’s next rate decision is July 15, when it will release updated economic forecasts.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE