BUSINESS

Economy shows resilience as inflation reaches 2.5 per cent and retail sales grow

Andy Blatchford The Canadian Press
Published Friday, July 20, 2018 8:39AM EDT Last Updated Friday, July 20, 2018 11:52AM EDT

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OTTAWA -- The Canadian economy displayed its staying power in a pair of reports Friday that showed a spring boost in retail sales and inflation at its fastest annual pace in more than six years.

Inflation accelerated last month to an annual clip of 2.5 per cent, up from a 2.2 per cent reading in May, said Statistics Canada's latest consumer price data. The growth was driven by higher energy prices, especially gasoline.

A separate release showed retail trade expanded by two per cent in May, thanks to stronger sales at vehicle and auto parts dealers as well as gas stations. It marked a rebound from April, when sales contracted by 0.9 per cent.

Analysts said the resilient numbers will likely give the Bank of Canada confidence to continue along its interest rate-hiking trajectory -- and could mean another increase sooner than previously expected. The central bank raised the trend-setting rate last week to 1.5 per cent, for its fourth increase over the past year.

Experts, however, still expect the deepening uncertainty around trade risks -- including an intensifying dispute with the United States -- will force Bank of Canada governor Stephen Poloz to stick with his careful approach to future hikes.

"They look to their forecasts and confirmation that their forecasts are playing out, which I think you're certainly seeing for the near term," TD senior economist James Marple said in an interview.

"(That) should give them some confidence that they can continue to slowly edge rates up. So, I'd say, yeah, the probability of another rate hike this year has increased with the recent spat of data."

Marple added, however, that every day remains a "balancing act" in terms of developments on trade policy. Due to this, he said it's possible Poloz pauses for the rest of 2018.

CIBC's Royce Mendes and Katherine Judge wrote in a research note to clients that the numbers Friday raise the likelihood the Bank of Canada moves again this year.

"But central bankers would need to see growth hold up in the face of a number of headwinds to pull the trigger," they wrote.

The economy faces considerable unknowns related to the stalled renegotiation of the North American Free Trade Agreement and the Trump administration's recent introduction of tariffs on steel and aluminum imports from Canada. Ottawa retaliated with tariffs of its own on U.S. imports of the metals as well as dozens of consumer products.

U.S. President Donald Trump is also threatening tariffs on vehicles and auto parts, a move experts warn would be devastating for economies and jobs on both sides of the border. On Thursday, the Canadian government vowed to retaliate with auto tariffs of its own, if Trump follows through on his threat.

Additional tariffs would drive up consumer prices for Canadians and Americans.

In Canada, the inflation figures Friday showed it's already running hot.

Other big contributors behind last month's stronger inflation figure were pricier airline tickets, restaurants and mortgage interest costs. The downward pressure on prices last month was led by cheaper costs for telephone services, travel tours and digital equipment and devices.

The June pace lifted inflation to its highest point since February 2012 when it was 2.6 per cent. It also moved the number farther away from the two per cent mid-point of the Bank of Canada's target range.

The central bank, however, had been expecting inflation to rise. Last week, the central bank predicted inflation to move as high as 2.5 per cent -- due to temporary factors like higher gas prices -- before it settles back down to two per cent in the second half of 2019.

The Bank of Canada can use interest rate hikes as a tool to help prevent inflation from climbing too high. Poloz tries to keep inflation within a range of between one and three per cent.

The report Friday also said the average of Canada's three measures of core inflation, which leave out more-volatile data like pump prices, rose slightly last month to 1.96 per cent, from 1.9 per cent. Underlying inflation is closely watched by the central bank.

The agency also released rates for major cities, but cautioned that figures may have fluctuated widely because they are based on small statistical samples (previous month in brackets):