It’s been the Bank of Canada’s position to look through both the currency and oil-price effects on inflation as “transitory” factors, and consider underlying inflationary pressures aside from them – which continue to look pretty tame, given a sluggish economy that still has ample spare capacity.Patrick Doyle/Bloomberg
Two major Statistics Canada economic reports Friday have given policy makers at the Bank of Canada a lot to chew on. With both sides of its policy chops.
On the one side, January's year-over-year inflation rate came in at a hotter-than-expected 2 per cent – smack-dab on the Bank of Canada's long-standing target for inflation, and up sharply from 1.6 per cent in December. If the inflation-targeting central bank was playing things by the book, that suggests that inflation is beginning to point to an eventual interest-rate increase.
On the other side, December's retail sales (seasonally adjusted) slumped a bigger-than-expected 2.2 per cent from November, wiping out November's strong 1.7-per-cent gain and implying that economic growth may have ground to a near-standstill at the end of the year. For those who have grown nervous about the country's fragile economy, that bolsters the argument that the bank should be thinking more about another rate cut.
In the wake of the two reports, economists were similarly of two minds about which one deserves greater weight.
"In our view, the greater market emphasis is to be put on stronger-than-expected inflation readings," Bank of Nova Scotia economists Derek Holt and Dov Zigler said in a research note, calling the inflation report a reminder to the markets and the Bank of Canada "that they have been too light in their treatment of inflation risk."
"In our view, the weak retail report should draw more of the market's focus," countered HSBC Bank Canada chief economist David Watt, who noted that on a volume basis, the 2.3-per-cent decline was the biggest month-to-month drop since December, 2008 – the depth of the global financial crisis. He said the numbers "highlight an economy that has little sustained upward pressure on prices, and that lacks traction heading into 2016, with consumers behaving very cautiously."
Both the inflation and the retail numbers certainly raise legitimate (if very different) concerns. But both reports also come with enough qualifiers that they may not tell us much about the underlying trend.
The weak retail sales unwind an awful lot of the previous good news on December growth from wholesale trade (up 2 per cent), manufacturing sales (up 1.2 per cent) and exports (up 3.9 per cent). Economists now figure real gross domestic product managed little or no growth in December, and probably didn't do much better for the fourth quarter as a whole. (Statscan releases its December, fourth-quarter and year-end gross domestic product figures on March 1.)
And the slowing year-over-year pace of retail sales growth – it was a puny 0.5 per cent on a volume basis in December, the weakest in three years – raises doubts about the capacity of cheap fuel prices to deliver their long-promised boost to consumer spending. The weakness "suggests that spending restraint due to job losses in oil-producing provinces is starting to cancel out more of the spending growth in oil-importing provinces on a national basis," Canadian Imperial Bank of Commerce economist Andrew Grantham argued in a research report.
Still, there are reasons to think the December numbers overstate the weakness in retail demand.
Statscan's seasonal adjustments, which are meant to smooth out the lumpy, calendar-linked nature of many spending habits during the year, may not be properly capturing the shifting trends of the huge holiday shopping season – both toward Black Friday (which has increasingly moved purchases into November) and toward gift cards (which shift many purchases into the New Year, as those sales are only recorded when the cards are redeemed). This is the fourth year in a row that seasonally adjusted sales have risen in November and declined in December. (Unadjusted December sales were actually up 10 per cent over November, while November's unadjusted sales were down 2 per cent.)
Often, a weak seasonally adjusted December has been followed up by a retail rebound early in the new year. While the shaky financial markets may have rattled consumer confidence in January, those seasonal distortions may still spell brighter figures – and a reason for the Bank of Canada to remain patient with the retail data.
On the inflation front, there's no doubt that the deep decline in the Canadian dollar has put substantial upward pressure on prices for key imported consumer goods. Food prices in January rose 4 per cent from a year earlier; prices for fresh vegetables (heavily reliant on imports at this time of year) were up by 18 per cent. Meanwhile, with much of the plunge in oil prices having come a year ago, the impact of lower fuel prices is quickly coming out of the year-over-year inflation numbers; indeed, despite slumping gasoline prices in January, they were actually up 2.1 per cent from a year earlier.
But it's been the Bank of Canada's position to look through both the currency and oil-price effects on inflation as "transitory" factors, and consider underlying inflationary pressures aside from them – which continue to look pretty tame, given a sluggish economy that still has ample spare capacity. Whether the central bank can continue to treat the sustained weakness in the currency as a temporary aberration is a legitimate question; but with the currency having rebounded since late January, likely reversing some of its upward pressure on prices, it's not a question the bank will need to answer in the short term.
The Bank of Canada may well consider the data, taken together, as a saw-off. The conflicting numbers and notable asterisks make as good an argument as any to hold the bank's key interest rate at 0.5 per cent and wait for something more definitive to emerge.
David Parkinson