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Inflation Remains Steady at 1.6% for April, Retail Sales Surprise in March

Canada’s consumer inflation (CPI) remained unchanged at 1.6% in April. Only 2 of the eight components of CPI showed contraction. Gasoline prices were up 15.9% (year on year), and this largely contributed for the transportation component to increase by 4.2%. The other large component of CPI: shelter costs were up 2.2%, with the rapid rise in home prices and rentals in two of the largest markets (Greater Toronto Area, and Greater Vancouver Area), resulting in a 3.9% surge in homeowners’ replacement cost index.  Heating costs also contributed, with natural gas prices up sharply by 15.2%. The other major contributor towards inflation was the recreation, education, and reading index which was up 3.3% from last year. The two components where prices dropped from last year were clothes and footwear, down 2.00%, and food, down 1.1%. The base year impact of low crude oil prices is going to fade out in the coming months (Crude oil prices were much lower this time last year, but accelerated in the latter months), and this could put downward pressure on inflation. On the other hand, food prices have declined for seven consecutive months, but could start to reverse as the weak Loonie feeds through to higher food prices. The three core inflation numbers of the Bank of Canada were also muted, showing very little inflationary pressures. The CPI Common, which as per the Bank of Canada is the best gauge of inflation, was steady at 1.3%. There is still a substantial amount of spare capacity in the economy as there is very inflationary pressure across the board. 

Retail sales expanded at a higher than expected 0.7% in March to $48.3 billion. Sales at motor vehicle and parts dealers, which constituted 27% of retail sales, were up 3.2% with new car sales increasing by 3.8%.  The importance of this sector can be gauged from the fact that if we exclude auto sales, the rest of retail sales actually contracted by 0.2%. Outside of auto sales, sales at electronic and appliance stores were up 3.1%. Both these segments indicate demographic changes, as income levels have not really changed, nor has there been significant employment growth. The spending on new cars and appliances indicates that it is not from incremental income, but from accumulated wealth. Increased borrowing also had an important role to play with Canadian consumer debt levels increasing to record levels. The two large provinces: Ontario and British Columbia, which account for over half of aggregate retail sales, posted increase in retail sales of 0.9% & 2.3% respectively. Quebec and Alberta showed contraction in retail sales of 0.8% & 0.5% respectively. Overall the tone of retail sales was weak, with contraction in 5 of the 11 sub sectors which account for 47% of total retail trade.

Market Reaction

The Canadian Dollar weakened after the release of this data, but the weaker tone for the US Dollar across the globe, as we headed towards the long weekend in Canada resulted in a much firmer Canadian Dollar at close. The Canadian Dollar closed at its strongest level in a month, as the market is also wary of OPEC’s meeting on May 25, where production cuts could be extended for another 9 months. Inflation data and softer than expected core retail sales data means that the Bank of Canada is not anywhere close to increasing rates in the near or medium term. This means that as the US pulls ahead and increases rates further, interest rate differentials will start to weigh in on the Canadian Dollar. This should result in a weaker Canadian Dollar in the second half of the year. 

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