Inflation rises for second straight month, but data disappoint

The country’s annual inflation rate rose 2.2% in May for the second straight month as the higher cost of energy applied upward pressure on prices, Statistics Canada said in a new report Friday.

The latest inflation reading followed the 2.2% number for April and 2.3% for March, the agency found in its consumer price index.

The main contributors to inflation last month were led by gasoline prices. Compared to a year earlier, they climbed 22.9% in May and helped drive overall energy prices for the month 11.6% higher.

Inflation also received a lift because Canadians paid more last month for restaurants, airline tickets and mortgage interest costs.

Consumers, however, paid less in May for telephone services, natural gas and digital devices and computers.

The report also found the average of the Bank of Canada’s three measures of core inflation, which leave out more-volatile numbers like pump prices, slowed to 1.9% last month.

Read: Advisors concerned about volatility, rising rates: survey

The core reading shows these underlying numbers, which are closely monitored by the central bank, cooled somewhat compared to April, when the average hit 2.03%—its strongest pace in six years.

“Expectations for a steep rise in inflation were running high, but today’s numbers came in miles below the street’s consensus,” says CIBC’s Royce Mendes in a research note. “The lack of hotter inflationary pressures owed to weakness across a handful of categories, but the Bank of Canada’s core measures are still hovering around the 2% target.”

But, even though there’s just over two weeks until the central bank’s next announcement, he adds, “there are still a number of events which could affect the decision.”

In a separate report Friday, Statistics Canada said retail trade delivered disappointment in April with a contraction of 1.2% that pulled total sales down to $49.5 billion. It marked its first month-to-month decline since December when sales also fell 1.2%.

The April decrease was mostly due to a 4.3% decline in sales by motor vehicle and parts dealers—with new car dealerships reporting a 5.1% drop and used car lots seeing a contraction of 4.1%.

The overall decline was concentrated in Canada’s largest provinces, the agency said. In Ontario, sales fell 2.3%, while Quebec saw a drop of 2.7%.

Statistics Canada, however, did release an upward revision to its retail sales data for March. The updated reading shows a 0.8% increase, compared to its preliminary 0.6% estimate.

National Bank’s Krishen Rangasamy says in a Friday report that April’s cold weather was a main driver of the data’s weakness. “The Canadian retail data for April was much weaker than expected. [But] does that mean Canadian consumers are finally folding under the weight of elevated household debt? True, a rough start to the year for the labour market (if you believe the Labour Force Survey) and rising interest rates could be weighing on consumers somewhat. But a colder than normal April also weighed on the results […].”

Excluding Ontario and Quebec data, he adds, “[…] Canada’s retail spending was actually up in April! So, the overall weak retail results have to be interpreted with caution.”

Friday’s data will help feed the Bank of Canada’s deliberations as its governing council considers its next interest rate decision.

The central bank’s next interest rate announcement is scheduled for July 11.

For inflation, the bank can use interest rate hikes as a tool to help prevent it from climbing too high. The Bank of Canada tries to keep inflation from moving outside a range of between 1% and 3%.

Recent inflation readings—including Friday’s—have been just above the mid-point of the bank’s target range.

It’s unlikely, however, to have a significant impact on upcoming rate decisions because governor Stephen Poloz has predicted inflation to stay above 2% for all of 2018.

In the spring, the bank raised its inflation projections because of what it described as the temporary effects of higher gas prices and the introduction of minimum wage increases in some provinces.

Poloz has predicted inflation to average 2.3% this year before settling back down to 2.1% in 2019.

He’s raised the trend-setting interest rate three times since last July, but he hasn’t touched the rate since January. It’s been at 1.25% ever since.

For months, experts have been predicting Poloz will raise the interest rate at the July meeting.

But, because of growing uncertainty linked to U.S. President Donald Trump’s protectionist agenda, some experts are starting to wonder if Poloz will wait a little longer.

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