Surprise uptick in inflation unlikely to sway Bank of Canada off course, economists say

OTTAWA ? The pace of inflation in Canada accelerated faster than expected last month, but economists said that costs are not rising in a level that would force the Bank of Canada to alter course.

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Food, shelter and transportation costs all rose in January because the consumer price index registered a two per cent jump for that month, the strongest level since November 2014 and higher compared to 1.8 percent consensus forecast.

Canadians shopping for groceries received one of the biggest sticker shocks, as data shows that prices for fresh vegetables jumped 18.2 percent in January year-over-year, following a 13.3 percent increase in December. Even gasoline prices saw a 2.1 percent rise, despite the low oil price environment.

The surprise uptick will certainly appeal to the central bank, but the recent rebound from the loonie to 73 cents U.S. should help temper prices for consumers, say economists.

“Given the strengthening in the currency because the Bank’s January decision, there is less likelihood these pass-through effects intensify further,” said David Tulk, head of global macro strategy at TD Securities. “As an effect, we have seen the financial institution comfortable to remain on the sidelines in anticipation of the announcement of the fiscal stimulus.”

January’s upward relocate prices was broad, with seven from the eight areas tracked by Statistics Canada seeing higher prices (only clothing and footwear registered a little decrease). Core prices, which exclude food and because they tend to be volatile, also rose two percent for the month.

Stronger prices complicate the picture for that Bank of Canada, which has loosened monetary policy in the past year by cutting interest rates from one percent as of last January to the present 0.Half mark. The moves have led to the weaker dollar, something the bank noted last month when Governor Stephen Poloz opted to keep the bank’s overnight rate unchanged.

“The combination of slowing growth and rising inflation is a trend the Bank of Canada don’t want to determine continue,” said Tulk.

Canada’s dollar is currently trading at roughly 73 cents U.S. after falling to a 13-year low of just below 69 cents last month. The currency continues to be steadily retreating against its American counterpart since it was last at parity three years ago.

Weaker purchasing power means goods have grown to be more costly to import. Vegetable and fruit prices bear some of the biggest sticker shocks just because a large amount of produce in the country is imported. 

Retail sales data released by Statistics Canada Friday also showed that even while sales dropped in December, retailers raised the prices by an average of two per cent in the month.

“Retailers could be adjusting prices to mirror higher import costs, thanks to a significantly depreciated Canadian dollar,” said Krishen Rangasamy, senior economist at National Bank of Canada.

Paul Ashworth, chief The united states economist at Capital Economics, asserted rising inflation in recent months is starting to eat into Canadian real incomes. The Organisation for Economic Co-operation and Development noted Thursday that core inflation in Canada may be the highest among its 34 members of primarily high-income countries.

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“Rising prices at the supermarket are already gaining media attention and may begin to eat into consumer confidence,” he said.

It remains to be seen whether the consumers will ramp down spending if prices still rise. Statistics Canada reported that retail sales fell 2.2 percent in December, or 2.3 per cent on the real basis accounting for the outcome of costs, which was the largest drop since 2008.

But economists have noted that December retail sales have been weak in Canada previously three years, because of factors such as more Canadian retailers taking part in Black Friday Sales in November. Mild weather further worsened sales as building materials, winter clothing and winter sporting goods sales all dropped off.

One area where the weakness may linger is vehicle sales. Statscan asserted new sales fell 4.1 percent in December, while used sales were down 2.5 per cent for that month. Scotiabank said in a report last month it expects Canadian car sales to be flat this season, after experiencing record development in 2015. Weakness in oil provinces is anticipated to weigh on strong sales in additional robust economies such as Ontario, Bc and Quebec.

Overall, retail sales in December were weakest within the resource provinces, with Alberta seeing a 3.1 per cent decline in sales and it is third stop by the past four months. Sales in Saskatchewan dropped 1.1 percent while those in Newfoundland and Labrador were down 4.4 per cent.