Today’s robust reading on Canada’s economy boosts expectations of more rate hikes to come this year

Canada’s economy is proving increasingly robust in the second quarter, with inflation and retail sales coming in ahead of economists’ expectations.

The consumer price index recorded an annual pace of 2.5 per cent in June, the fastest year-over-year acceleration since 2012, Statistics Canada said Friday from Ottawa. Economists in a Bloomberg survey anticipated a 2.3 per cent increase. In a separate report, the agency said the nation’s retailers recorded a 2 per cent increase in sales in May, double the median forecast from economists.

The reports, a reverse of last month’s disappointing sales and inflation data, will bolster expectations for continued interest rate increases this year from the Bank of Canada. The retail sales report in particular, which indicates consumer spending is ticking along, will be taken as a positive signal for the underlying strength of the country’s economy.

Earlier Friday, investors had been pricing in about a 50 per cent chance of a quarter-point rate increase at the central bank’s October meeting.

The inflation numbers will be less of a surprise, given the Bank of Canada had indicated it expects CPI to spike before falling back later this year. The annual increase reflects higher gasoline prices and food purchased from restaurants, the agency said. On the month, consumer prices rose 0.1 per cent in June, versus an expectation for a flat reading.

Core measures of inflation — seen by officials as a better gauge of underlying inflation trends — ticked up slightly to an average of 1.97 per cent, from 1.93 per cent in May.

The retail sales numbers largely reflected an increase in receipts at vehicle dealerships and gas stations, but even excluding autos, the numbers came in well ahead of what economists were expecting. Sales excluding car dealers were up 1.4 per cent, versus economist expectations for a 0.5 per cent gain.

The strength was volume related, with sales up 2 per cent once price changes were factored out.

Other CPI Highlights

The average of the Bank of Canada’s three key core inflation measures rose to 1.97 per cent in June from 1.93 per cent in May.
The “common” and “median” core rates were unchanged at 1.9 per cent and 2 per cent, while the “trim” rate rose to 2 per cent from 1.9 per cent
Inflation for services in June was 2.2 per cent. Goods inflation was 2.7 per cent
Energy prices climbed 12.4 per cent in June, and gasoline, 25 per cent higher, was the biggest upward contributor during the month

Other Retail Highlights

Sales climbed in 8 of 11 subsectors tracked by Statistics Canada Ontario (up 2.6 per cent) and Quebec (up 3 per cent) saw the biggest gains in retail sales in May

With assistance from Kevin Varley

Bloomberg.com

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