Canada Inflation, Retail Sales Advance Less Than Forecast

Canada’s inflation rate accelerated less than economists forecast in May as a jump in natural gas prices was partly offset by a drop in transportation costs, while retail sales for April also rose less than expected, adding to evidence consumers are less able to drive growth.

The consumer price index rose 0.7 percent in May from a year ago, following a 0.4 percent April gain that was the slowest since October 2009, Statistics Canada said today from Ottawa. The core rate, which excludes eight volatile products, advanced at a 1.1 percent pace for a second month. Economists surveyed by Bloomberg forecast that total inflation would be 0.9 percent and the core rate would be 1.2 percent.

Canada’s dollar fell to the lowest in 19 months, capping a week where Bank of Canada Governor Stephen Poloz said that the economic recovery needs “patience” and that he has flexibility in how fast he brings inflation back to his 2 percent target. The bank has kept its key lending rate at 1 percent since September 2010 and Poloz said business investment and exports must take over from consumers as the major source of demand.

“We don’t think it’s likely that the Canadian economy can lean on the consumer to generate much growth going forward,” Ian Pollick, a senior fixed-income strategist at Royal Bank of Canada’s capital markets unit, said by telephone from Toronto.

The Canadian dollar fell 0.7 percent to C$1.0460 per U.S. dollar at 3:52 p.m. in Toronto after touching C$1.0489, the weakest since Nov. 25, 2011. One dollar buys 95.60 U.S. cents.

Food Costs

Food prices rose 1.3 percent in May from a year ago compared with a 1.5 percent April gain, Statistics Canada said. Natural gas costs jumped 15.4 percent, the most since December 2008, with the third gain in four months following 25 consecutive declines.

Transportation costs declined 0.5 percent from a year earlier, following a 2.1 percent drop in the previous month. Retail gasoline prices fell 1.5 percent in May, less than April’s 6 percent decrease.

The central bank sets interest rates to keep inflation in the middle of a 1 percent to 3 percent band, and prices have been below the 2 percent midpoint since April 2012.

Inflation will average 0.9 percent this quarter and reach 1.6 percent in the last three months of the year, according to a Bloomberg economist survey taken June 7 to June 12.

Tim Hortons Inc. Chief Executive Officer Paul House told investors June 4 that sales at its Canadian coffee and donut shops have slipped because of layoffs in manufacturing regions such as Ontario.

More Discounting

“We see in some of those kinds of markets that our consumer is still coming to us but maybe not as frequently as they were,” he said. “In the last couple of years we have done more discounting than we have historically just to respond to the competitive environment that we find ourselves in.”

On a monthly basis, both the total inflation and core rates advanced 0.2 percent in May. Those results also trailed economists forecasts for total monthly prices to rise 0.4 percent and the core rate to advance 0.3 percent.

The seasonally adjusted inflation rate rose 0.1 percent in May while the adjusted core index was unchanged.

In a separate report, Statistics Canada said that retail sales rose 0.1 percent in April to C$39.5 billion ($38.1 billion). Economists forecast a 0.2 percent gain in a Bloomberg survey with 23 responses.

Little Power

“There is some commonality in inflation and retail,” said Doug Porter, chief economist at BMO Capital Markets in Toronto. “The big story is pricing power remains very soft because the consumer doesn’t have a lot of spending power.”

Purchases excluding the motor vehicle and parts category fell 0.3 percent for a second month, while economists had forecast they would be little changed.

Sales excluding the impact of price changes, which gives a better indication of the sector’s contribution to growth, rose 0.5 percent in April, according to the report.

From a year earlier, retail sales rose 1.5 percent in April.

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