Inflation rate up, retail looks sluggish

Canada's annual inflation rate accelerated in September but softer-than-expected retail sales growth for August and a sluggish estimate for September suggest a dampening heading into the holidays, Statistics Canada data showed on Wednesday.

The annual inflation rate rose to 0.5 per cent in September, up from 0.1 per cent in August and just ahead of analyst expectations of 0.4 per cent, driven by transportation, recreation and higher prices for new housing.

Retail sales, meanwhile, rose by 0.4 per cent in August from July, missing analyst expectations of a gain of 1.1 per cent. StatCan's preliminary estimate for September suggested the measure would be “relatively unchanged” for that month.

“There was no real surprise with the CPI; it was so close to expectations,” said Doug Porter, chief economist at BMO Capital Markets. “Unfortunately retail sales were disappointing... That probably overshadows the CPI.”

The Canadian dollar was trading nearly unchanged at 1.3122 to the greenback, or 76.21 U.S. cents, having pulled back from an earlier six-week high at 1.3081.

The three core measures of inflation were little changed. The common measure, which the Bank of Canada says is the best gauge of the economy's underperformance, remained at 1.5 per cent.

That is likely encouraging for the Bank of Canada, though risks remain, said analysts.

“The fact that underlying inflation is relatively stable somewhat reduces aggressive further action by the BoC. But the fact that retail sales have stalled out means they'll still be on alert,” said Porter.

Bank of Canada Governor Tiff Macklem said earlier this month that bold policy actions taken in response to the coronavirus pandemic had been needed, but will make the economy more vulnerable to economic shocks down the road.

The central bank will release its updated outlook for the Canadian economy next Wednesday along with its regular rate decision. The Bank has signalled interest rates will remain low for at least two years, though it has started winding down some measures aimed at supporting liquidity.

On inflation, prices rose in six of the eight major components in September on a year-over-year basis, StatsCan said. Gas prices were down 10.7 per cent, while the increase in prices for passenger vehicles edged up to 2.7 per cent.

Air transportation prices, meanwhile, fell less than usual in September, as usual travel patterns continued to be disrupted by the coronavirus pandemic, StatsCan said.

While retail sales missed expectations, they were up 3.5 per cent from a year ago, though sales at clothing stores remain well-below pre-pandemic levels, StatCan said.