MONTREAL — One of the first things Bank of Canada Governor Steven Poloz said in his April press conference was that, “inflation is on target and the economy is operating close to potential,” RBC Bank reported today.
Today’s inflation and retail sales data, the last major releases before the bank’s May 30 meeting, reinforce that view, said Economist Josh Nye, who noted the bank’s core inflation measures averaged 2 percent for a third consecutive month.
“We saw some evidence of underlying inflation accelerating earlier this year, such as seasonally-adjusted prices excluding food and energy were up an annualized 2.7 percent in the first quarter,” he explained. “But that wasn’t the case in April with core prices coming in flat month-over-month.”
Rising gasoline prices should push headline inflation higher in the near term, but the Bank of Canada anticipated that their second quarter forecast is 2.5 percent, and it indicated some tolerance for above-target inflation given downside misses in recent years.
As for the economy operating close to potential, this morning’s increase in retail sales provides further evidence that January’s soft GDP was transitory, said Nye.
“We continue to expect GDP growth in Q1 as a whole was right on the bank’s 1.8 percent estimate of the economy’s potential,” he added. “The upshot is the bank has little reason to deviate from their narrative that less stimulus will be required over time. But with reasons to remain cautious, we continue to think the next hike will be in July rather than May.”
All items inflation edged back down to 2.2 percent year-over-year in April after having increased to 2.3 percent in March. Market expectations, and our own, were for headline inflation to hold steady at 2.3 percent.
Except for food and energy, the consumer price index also dipped slightly to 1.8 percent from 1.9 percent.
The Bank of Canada’s core measures, however, generally increased in April. The trim and median measures both rose to 2.1 percent. Including CPI-common, the average of the three was 2.0 percent after rounding for a third consecutive month.
“After accelerating over the last two months, energy inflation slowed on a year-over-year basis as a sharp increase in gasoline prices in April 2017 was not matched this year,” said Nye. “We should see the opposite in May, with pump prices having increased recently compared with a decline a year ago. Lower prices for recreational goods and services, and particularly travel services, weighed on inflation in April.”
Canadian retail sales up 0.6 percent in March
The nominal sales increase was a touch stronger than expected and sale volumes increased a larger 0.8 percent in March, said RBC Senior Economist Nathan Janzen.
“Even with that gain, earlier weakness left volume sales down 4.0 percent at an annualized rate in the first quarter,” he explained. “Some ’payback’ was probably due, though, after sale volumes posted their strongest rise since 2004 last year as a whole.
“Stronger increases over the last two months bode well for a return to positive growth in the second quarter,” he added. “To be sure, the latest increase in March was heavily concentrated in motor vehicle and parts sales but sales of clothing, furniture and general merchandise sales also increased solidly.”
The volume of gasoline station sales and food store sales both fell sharply for a third straight month.
“The retail sales data follows already reported increases in manufacturing activity and exports. labor markets have also continued to improve,” said Janzen. “We continue to expect GDP increased about 0.2 percent in March. That would leave growth in the first quarter at a still-respectable 1.8 percent — right in line with the Bank of Canada’s estimate of ‘potential’ growth despite transitory disruptions that weighed on overall economic output in January.”
Retail sales rose 0.6 percent in nominal terms in January — marking a third straight monthly gain.
Volume sales rose 0.8 percent to mark a second consecutive monthly increase. The measure was still down 4.0 percent at an annualized rate in the first quarter, but a return to positive growth in the last two months increases the odds that an upward trend resumes in the second quarter.
E-commerce sales, which represents 2.6 percent of overall retail sales, were up 11.1 percent from a year ago.
SOURCE: RBC press release