Canadians are still buying new cars and vegetables even as they become more expensive, supporting the central bank’s view the economy will recover from a commodity crash without further interest-rate cuts.
December inflation climbed at the fastest pace in a year at
1.6 percent, led by double-digit gains for fruit and vegetables and a reduced drag from gasoline, Ottawa-based Statistics Canada said Friday. The agency also reported retail sales rose 1.7 percent in November, almost triple the highest estimate in a Bloomberg economist survey.
Bank of Canada Governor Stephen Poloz kept his key lending rate at 0.5 percent Wednesday, bucking some investor calls for a cut, citing “roughly balanced” inflation risks. Friday’s report meshes with his view a weaker dollar -- which makes imported goods like some food more expensive -- is countering slack in the economy from the plunge in oil prices.
“From the bank’s perspective it does validate some of their expectations that in some parts of the economy the up trend is under way,” said Dawn Desjardins, assistant chief economist at Royal Bank of Canada in Toronto.
“Food that we have to import did see healthy increases over the course of last year,” she said. “We have seen a stealth impact in terms of the currency from that perspective, but of course we have the offset of gasoline prices.”
Fresh fruit and vegetable prices rose 13 percent in December from a year earlier, pushing up total food costs 3.7 percent. Most fresh produce is imported from the U.S. or Latin America during winter. Canada’s dollar fell 16 percent last year versus the U.S. currency.
Cutting interest rates again may have extended the Canadian dollar’s rapid slide and led to a burst of inflation down the road, Poloz told reporters Wednesday, citing that risk as part of his rationale for shifting away from an earlier bias to cut rates.
Canadians have been perhaps most vocal about the sticker shock for one imported good: cauliflower prices jumped to C$7 ($4.90) a head in some cities this month, sparking a wave of online discussions and news stories.
Price gains have lagged the Bank of Canada’s 2 percent target for more than a year. Poloz said Wednesday the commodity crash will keep inflation and the economy from returning to normal until around the end of next year.
The central bank’s prediction the recovery will be one with modest inflation got another shot in the arm Friday. The core rate of inflation, which excludes eight volatile items, slowed to 1.9 percent, from 2 percent in the prior month. That was the most moderate pace since July 2014. Poloz has argued the “underlying trend” of inflation is below 2 percent and that some of the elevated readings on core were temporary.
“The moderation in core is good news indeed for the Bank of Canada, which had openly fretted about the possible inflation pressure from a weaker Canadian dollar,” said Doug Porter, chief economist at BMO Capital Markets in Toronto. The retail and inflation figures are “a relatively encouraging pair of economic reports, for a change.”
The retail sales and inflation reports both showed rising spending on cars and trucks. Automobile prices rose 3.1 percent in December from a year ago, while retail sales rose 3.5 percent in November for a 12-month gain of 11 percent.