TORONTO -- Canadian retail sales in January rose a robust 0.7 percent, which was slightly stronger than the 0.6 percent rise expected going into the report.
This small upward surprise occurred despite new car sales being much weaker than expected by dropping 2.3 percent. The offset was an unexpectedly large surge of 1.8 percent in ex-auto sales that was more than triple the 0.5 percent gain expected going into the report, said Paul Ferley, assistant chief economist with RBC Economics Research.
The story was not as upbeat on a volumes basis because retail sales were only up 0.1 percent although this followed a 0.8 percent gain in December. StatsCan commented that there were large price increases in January in gasoline and new cars. The latter implies that new car sales volumes declined significantly more than the 2.3 percent drop in receipts, said Ferley.
The jump in ex-auto sales was attributable to sales at building and outdoor home supplies stores rising an impressive 7.4 percent. This strength was attributed to households making purchases before the expiration of the federal government’s Home Renovation Tax Credit. This factor may also have boosted sales at furniture, home furnishings and electronic stores, which rose 2.5 percent boosted by surge in sales of floor coverings. Notable sales gains were also recorded in food and beverage stores (1.9 percent) and clothing stores (0.5 percent).
Sales gains occurred in seven of 10 provinces. Strongest percentage increases occurred in Newfoundland and Labrador (2.1 percent), PEI (1.6 percent) and Ontario (1.4 percent). Sales in BC were flat in the month although the Olympics will likely significantly boost sales activity in February.
The 0.1 percent rise in the volume of retail sales suggests that little support is coming from this sector in the January GDP add-up; however, it also implies no offset to reports earlier this week of strong gains in manufacturing and wholesale trade of 2 percent and 3 percent, respectively. These two reports augur well for January GDP to rise a solid 0.5 percent in the month and the first quarter of 2010 annualized growth not to slow materially from the 5.0 percent surge recorded in the fourth quarter of 2009.
Solid growth along with the unexpected decline in the February unemployment rate to 8.2 percent implies that slack built up during the recession is starting to be absorbed. Such an environment flags the need for the Bank of Canada to start moving interest rates higher, Ferley explained.
"The February CPI report, released earlier this morning, raised some concerns on the inflation front with the year-over-year core rate unexpectedly rising, yet the pressure may prove temporary because for the most part it reflected higher accommodation costs in Vancouver for the Olympics," said Ferley. "Strengthening growth sets the stage for policy to start to be tightened although, assuming that the price pressure proves transitory, we expect that the Bank of Canada will adhere to its conditional commitment of holding the overnight rate unchanged at 0.25 percent until the end of the second quarter."
Canada’s annual core inflation rate in February rises unexpectedly
The February consumer price report rose a greater than expected 0.4 percent in the month. Expectations going into the report were for an increase of 0.3 percent. This did not prevent the year-over-year rate from dropping to just 1.6 percent from 1.9 percent in January.
Expectations had been for a drop to 1.4 percent. There was an even greater upward surprise on a core basis where the index rose a sizeable 0.7 percent, which compared to an expected increase of 0.3 percent. This sent the year-over-year rate up to 2.1 percent from 2.0 percent in January. Market expectations had been for this annual rate to drop to 1.7 percent.
The upward surprise on both the overall and core basis was concentrated in traveler services (includes both traveler accommodation and tours), which rose almost 18 percent in the month. This increase added 0.4 percentage points to the overall increase in the CPI and was closer to a 0.5 percentage point hit on the core measure, said Ferley.
This jump in prices greatly reflected the effect of the Vancouver Whistler Winter Olympics where hotel prices rose sharply during the event. To the extent that this is true, the upward pressure should be for the most part reversed in March, Ferley predicted.
"The unexpected jump in the February year-over-year core inflation rate to 2.1 percent will raise some concerns at the Bank of Canada because the jump coincides with some robust January data released earlier this week that implied growth in the first quarter of 2010 could be as strong as the 5.0 percent increase recorded in the fourth quarter of 2009," said Ferley. "As well, the February labour market report unexpectedly showed the unemployment rate dropping to 8.2 percent; however, tempering these concerns is the fact that most of the upward surprise was concentrated in a single component, traveler services, with the pressure likely to be unwound in March.
"An eventual reversal of these pressures will not prevent the Bank of Canada from pushing the overnight rate higher from its current 0.25 percent although it will allow the pace of tightening to remain gradual," he added. "Assuming the March data confirm that the price pressure is transitory, we expect that the central bank will adhere to its conditional commitment of holding the overnight rate unchanged until the end of the second quarter yet raising it 100 basis points during the second half of this year."
SOURCE: RBC Economics Research press release