Canada Economy Shows Consumer Momentum on Inflation, Cars

Consumers are still driving growth in Canada’s economy, with indicators showing faster inflation led by higher food and clothing costs and increased auto wholesales adding to recent housing-market strength.

The consumer price index quickened to a two-year high of 2.4 percent in June, and a 13.3 percent jump in automobile receipts led a 2.2 percent rise in wholesale sales, according to reports today from Ottawa-based Statistics Canada. A July 15 realtor report showed home resales reached a four-year high with prices up 6.9 percent from a year earlier.

The figures suggest indebted consumers are continuing to shoulder the burden of growth as policy makers such as Bank of Canada Governor Stephen Poloz await a rebound in business investment to bring the economy to full output. Poloz kept his key lending at 1 percent two days ago and stressed weak exports and slack in the economy will hold down inflation through a temporary price surge.

“The Canadian consumer, debt and all, still seems to be in relatively good shape,” Dawn Desjardins, assistant chief economist at Royal Bank of Canada in Toronto, said in a telephone interview. “It does tee up for a better second half of 2014.”

Canada’s ratio of household debt to disposable income rose to a record last year before two quarterly declines through March. Credit-market debt such as mortgages fell to 163.2 percent of disposable income, compared with a revised 163.9 percent in the fourth quarter and a record 164.1 percent in the third quarter of last year, Statistics Canada said June 19.

Exceeding Forecasts

The core inflation rate, which excludes eight volatile products, increased 1.8 percent in June after a gain of 1.7 percent the prior month. Both rises exceeded economist forecasts, and came two days after the central bank said it remains neutral on its next interest rate move because faster inflation this year will be led by temporary gains in energy and import costs.

“Inflation is clearly warming up,” said Robert Kavcic, a Bank of Montreal senior economist in Toronto. “But Governor Poloz went to great lengths to tell us a good part of it is due to transitory factors,” he said, adding that core inflation would probably need to persist above 2 percent before Poloz would change his message.

Canada’s dollar strengthened after the reports, rising 0.3 percent to C$1.0735 per U.S. dollar at 11:34 a.m. Toronto time. Five-year government bond yields rose to 1.48 percent from 1.45 percent.

Inflation Streaks

Core and total inflation accelerated for the fourth month in a row. It marked the longest sequence of increases in total inflation since 2010 after the last recession, and the longest stretch for core inflation since 2001.

Canada’s economy is “showing gradual signs of improvement,” including retail sales and quicker inflation, Michael Simpson, portfolio manager at Sentry Investments Inc. in Toronto, wrote in a July 16 report. Companies outside of natural resources are more vulnerable to risks from a possible housing market correction and rising unemployment, he said.

Food costs rose 2.9 percent in June from 12 months earlier, faster than the May pace of 2.3 percent. Meat costs rose 9.4 percent and fresh vegetables gained 9.5 percent. Clothing and footwear inflation accelerated to 1.6 percent from 0.6 percent as retailers offered fewer discounts, Statistics Canada said.

Energy-price gains slowed in June. Electricity costs rose 4.2 percent, down from 7.0 percent in May, while gasoline inflation moderated to 5.4 percent from 6.3 percent.

The central bank said two days ago that “underlying inflationary pressures remain muted,” and “beyond the near term, the inflation projection is little changed,” from three months ago. The central bank is mandated to keep consumer-price increases in the middle of a 1 percent to 3 percent band.

Poloz still has a few months to assess whether inflation will end up being too fast, said Kavcic at BMO Capital Markets.

“In terms of the credibility issue, it’s a little too soon” to make judgment, he said.

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