Canada’s annual inflation rate crept higher in November to 0.9 per cent from 0.7 per cent in October but remained below the central bank’s target range, ensuring that chronically weak inflation will remain on policy makers’ radar as a top concern.
Retail sales in October came in weaker than expected, according to Statistics Canada data released on Friday.
The Canadian dollar weakened after the report, which confirmed analysts’ expectations that steep discounting around “Black Friday” would prevent inflation from gaining much momentum in the near term.
The consumer price index was flat in the month, Statistics Canada reported on Friday. The annual CPI rate was pushed higher mainly by shelter and food costs, while prices fell for health and personal care as well as for clothing and footwear.
But the annual core CPI, which excludes volatile items like gasoline and food, slipped 0.1 percentage point in the month for an annual rate of 1.1 per cent.
Both the total and core inflation rates were slightly below market expectations of 1.0 per cent and 1.2 per cent, respectively.
“I do think the real story here is on core inflation, the fact that we’re now just about scraping the very low end of the comfort zone for the Bank of Canada,” said Doug Porter, chief economist at BMO Capital Markets.
“I do think it’s largely due to the heavy-duty discounting we’re seeing among a number of retailers,” he said, referring to bargains being offered by Canadian stores to coincide with the U.S. shopping bonanza.
The Bank of Canada’s quarterly projections in October pegged average inflation at 1.3 per cent in the fourth quarter, which now looks highly unlikely. The bank will update its forecasts on Jan. 22.
The Canadian dollar weakened following the report to a session low of C$1.0713 to the U.S. dollar, or 93.34 U.S. cents, compared to Thursday’s close of C$1.0666 to the greenback, or 93.76 U.S. cents.
Inflation has been below the Bank of Canada’s 2 per cent target for 19 months. For seven of the past 13 months it has been below the 1 to 3 per cent range the bank tolerates.
Bank of Canada Governor Stephen Poloz told Reuters in an interview on Tuesday that the central bank is “having trouble explaining” why inflation is so weak, as well as being mystified by poor exports and business investment in the context of an improving U.S. economy.
The bank first explicitly stated an increased concern with inflation in its Oct. 23 interest rate decision when it shifted into a neutral monetary policy stance after 18 months of leaning towards rate hikes.
Still, Poloz made clear this week that he intends to hold the main interest rate at 1.0 per cent for some time. The bank hasn’t moved rates since September 2010.
Nobody believes the bank is about to cut rates, but the low inflation numbers could fuel market talk of a more dovish bank in 2014.
“All in all, it leaves Canada still in a disinflationary environment, which will concern the Bank of Canada, and likely increase ever so slightly the expectations for how long the Bank of Canada remains on hold, but also for the very small potential that they entertain a rate cut,” said Mazen Issa, macro strategist at TD Securities.
Retail sales unexpectedly fell by 0.1 per cent in October from September as a downturn at car dealerships offset upbeat supermarket sales.
Market analysts had forecast a 0.2 per cent increase in monthly sales, according to the median forecast in a Reuters poll.
The weak reading followed three straight months of gains as four of the 11 retail subsectors declined. In volume terms, retail sales grew 0.2 per cent in October.
Overall sales at motor vehicle and parts dealers fell 1.9 per cent. New car sales slid 1.6 per cent after a 4.6 per cent surge in the previous month. Gasoline station sales fell 1.6 per cent.
On the other hand, food and beverage stores registered a 1.7 per cent jump in sales.
Total sales excluding the auto sector grew 0.4 per cent.