GROCERIES DRIVE SURGE IN INFLATION.
Higher loonie likely to temper prices
• The pace of inflation in Canada accelerated faster than expected last month, but economists said that prices are not rising at a level that would force the Bank of Canada to change course.
Food, shelter and transportation costs all rose in January as the consumer price index registered a two-per-cent jump for the month, the strongest level since November 2014 and higher than the 1.8- per- cent consensus forecast.
Canadians shopping for groceries received one of the biggest sticker shocks, as data shows that prices for fresh vegetables jumped 18.2 per cent in January year over year, following a 13.3- percent increase in December. Even gasoline prices saw a 2.1- per- cent rise, despite the low oil-price environment.
The surprise uptick will certainly catch the attention of the central bank, but the recent rebound of the loonie to 73 U. S. cents should help temper prices for consumers, say economists.
“Given the strengthening in the currency since the bank’s January decision, there is less likelihood that these pass- through effects intensify further,” said David Tulk, head of global macro strategy at TD Securities. “As a result, we see the bank comfortable to remain on the sidelines in anticipation of the announcement of the fiscal stimulus.”
January’s upward move in prices was broad, with seven of the eight areas tracked by Statistics Canada seeing higher prices ( only clothing and footwear registered a small decrease). Core prices, which exclude food and energy because they tend to be more volatile, also rose two per cent for the month.
Stronger prices complicate the picture for the Bank of Canada, which has loosened monetary policy in the past year by cutting interest rates from one per cent as of last January to the current 0.50 per cent mark. The moves have contributed to the weaker dollar, something the bank noted last month when governor Stephen Poloz opted to keep the bank’s overnight rate unchanged.
“The combination of slowing growth and rising inflation is a trend that the Bank of Canada would not want to see continue,” said Tulk.
Canada’s dollar is cur- rently trading at roughly 73 U. S. cents after falling to a 13- year low of just under 69 cents last month. The currency has been steadily retreating against its American counterpart since it was last at parity three years ago.
Weaker purchasing power means goods have become more expensive to import. Vegetable and fresh fruit prices bear some of the biggest sticker shocks because a large amount of produce in the country is imported.
Retail sales data released by Statistics Canada Friday also showed that even as sales dropped in December, retailers raised their prices by an average of two per cent in the month.
“Retailers could be adjusting prices to reflect higher import costs, courtesy of a much depreciated Canadian dollar,” said Krishen Rangasamy, senior economist at National Bank of Canada.
Paul Ashworth, c hief North America economist at Capital Economics, said that rising inflation in recent months is beginning to eat into Canadian real incomes. The Organization for Economic Co-operation and Development noted Thursday that core inflation in Canada is the highest among its 34 members of primarily highincome countries.
“Rising prices at the grocery store are already gain- i ng media attention and could begin to eat into consumer confidence,” he said.
It remains to be seen whether t he consumers will ramp down spending if prices continue to rise. Statistics Canada reported that retail sales fell 2.2 per cent in December, or 2.3 per cent on a real basis accounting for the impact of prices, which was the biggest drop since 2008.
But economists have noted that December retail sales have been weak in Canada in the past three years, owing to factors such as more Canadian retailers participating in Black Friday sales in November. Mild weather further worsened sales as building materials, winter clothing and winter sporting goods sales all dropped off.
One area where the weakness may linger is vehicle sales. Statistics Canada said that new sales fell 4.1 per cent in December, while used sales were down 2.5 per cent for the month. Scotiabank said in a report last month that it expects Canadian car sales to be flat this year, after experiencing record growth in 2015. Weakness in oil provinces is expected to weigh on strong sales in more robust economies such as Ontario, British Columbia and Quebec.
Overall, retail sales in December were weakest in the resource provinces, with Alberta seeing a 3.1- percent decline in sales and its third drop in the past four months. Sales in Saskatchewan dropped 1.1 per cent while those in Newfoundland and Labrador were down 4.4 per cent.