Canada’s Inflation Rate Slows to 7.6% in July While Retail Sales Rose 1.1% in June to $63.1-Billion

Inflation in Canada finally appears to have peaked, but it nonetheless remains too high to dissuade the Bank of Canada from raising interest rates significantly in September, economists say. The year-over-year inflation rate slowed to 7.6% in July, Statistics Canada reported, with the deceleration largely driven by a decline in gas prices even as prices for food, rent and travel continued to rise.

Economists had pointed to the nearly 40-year high of 8.1% in June as the likely high water mark for the overall inflation rate, which had previously increased every month since June 2021. In a further indication that price gains are slowing, the agency said July’s month-over-month increase was the smallest since December 2021.

Still, inflation is well above the Bank of Canada’s 2% target. Bank of Canada governor Tiff Macklem said he understands that higher interest rates add to Canadians’ financial challenges, but that raising borrowing costs is the best way to rein in the rising cost of living.

The Bank of Canada is hoping that a series of interest rate hikes will dampen demand in the economy enough to slow the pace of price increases. “You need the higher rates and the inflation to cause people to slow down their spending patterns, which, in fact hasn’t happened to that greater degree,” said TD chief economist Beata Caranci, noting that consumer spending in Canada rose at a faster pace than in the U.S. during the first half of the year.

Caranci said the central bank is paying closer attention to the core measures of inflation, which are less volatile than the headline number — and have remained relatively unchanged since June. Economists are widely expecting the Bank of Canada to raise its key interest rate by three-quarters of a percentage point on Sept. 7.

Whatever the central bank is planning to do, University of Calgary economics professor Trevor Tombe said it’s unlikely that the latest inflation data will change its plans, noting there’s a lag between interest rate decisions and their impact on the economy. “They’re not going to accelerate or decelerate their plans, just based on what we’re seeing in this report,” said Tombe. “It is important to remember, the monetary policy takes a long time to work its way through (the economy).”

The Statistics Canada report echoes the most recent inflation data out of the United States, which saw the rate of price increases drop to 8.5% in July from 9.1% the previous month — also due in large part to a drop in prices at the pump.

In Canada, although gas prices rose 35.6% in July compared to July 2021, that was down from a whopping 54.6% increase in June. Still, Canadians are feeling the pinch from inflation as food costs were up 9.9% compared with July 2021.

Statistics Canada said the downward pressure on prices at the pump was due to a combination of factors, including ongoing concerns related to a slowing global economy, increased COVID-19-related public health restrictions in China and slowing demand for gasoline in the United States.

Among food items that have gotten considerably more expensive, bakery goods are up 13.6% since July 2021 amid higher input costs as the Russian invasion of Ukraine continues to put upward pressure on wheat prices. The prices of other food products also rose faster, including eggs, which are up 15.8%, and fresh fruit, up 11.7% since July 2021.

Higher mortgage rates are increasing demand for rental units, which are in short supply in many major cities. Rent increased 4.9% in July compared to July 2021, compared with 4.3% in June, and is the biggest jump since the fall of 1989. “Weakening housing markets may keep upward pressure on this component,” Derek Holt, an economist at Bank of Nova Scotia, said in a note to his clients.

Source: Globe and Mail
Source: The Star
Source: Financial Post

Canadian Retail Sales – June 2022

Canadian retail sales increased 1.1% to $63.1 billion in June, boosted by higher sales at gasoline stations and motor vehicle and parts dealers, Statistics Canada said.  Core retail sales — which exclude gasoline stations and motor vehicle and parts dealers — rose 0.2%. However, the agency said its preliminary estimate for July suggests retail sales for that month fell 2.0%, though it cautioned the figure would be revised.

Bank of Montreal economist Shelly Kaushik said retail spending had a surprisingly strong June, though much of the headline strength was due to higher prices as volumes were sluggish. Retail sales in volume terms gained 0.2% in June. “Still, it looks like retail sales will add to growth in the second quarter. However, the flash estimate for July points to a weaker start to Q3,” Kaushik wrote in a report.

Source: Globe and Mail
Source: The Star
Source: Statistics Canada

U.S. Inflation Slips From 40-Year Peak but Remains High 8.5% While Retail Sales Were Flat in July

Falling gas prices gave Americans a slight break from the pain of high inflation in July, though the surge in overall prices slowed only modestly from the four-decade high it reached in June. Consumer prices jumped 8.5% in July compared with a year earlier, the government said, down from a 9.1% year-over-year jump in June. On a monthly basis, prices were unchanged from June to July, the smallest such rise more than two years.

Still, prices have risen across a wide range of goods and services, leaving most Americans worse off. Average paychecks are rising faster than they have in decades – but not fast enough to keep up with accelerating costs for such items as food, rent, autos and medical services.

In July, excluding the volatile food and energy categories, so-called core prices rose just 0.3% from June, the smallest month-to-month increase since April. And compared with a year ago, core prices rose 5.9% in July, the same year-over-year increase as in June.

The House is poised to give final congressional approval to a revived tax-and-climate package pushed by President Joe Biden and Democratic lawmakers. Economists say the measure, which its proponents have titled the Inflation Reduction Act, will have only a minimal effect on inflation over the next several years.

Canada’s Finance Minister, Chrystia Freeland, said that the U.S. inflation numbers were good news for Canada. “I really welcomed that data that we saw from the U.S. and I do want Canadians to be confident that our economy is fundamentally strong,” she told reporters. “There are big challenges in the global economy. But as a country we have the strength, we have the institutions, that are going to be able to cope with this to bring things back into balance.” While she said she cannot predict the future for Canadian inflation, she noted that Canada’s growth and jobs numbers in the first half of the year show the economy is strong.

While there are signs that inflation may ease in the coming months, it will likely remain far above the Federal Reserve’s 2% annual target well into 2023 or even into 2024. Chair Jerome Powell has said the Fed needs to see a series of declining monthly core inflation readings before it would consider pausing its rate hikes. The Fed has raised its benchmark short-term rate at its past four rate-setting meetings, including a three-quarter point hike in both June and July – the first increases that large since 1994.

A blockbuster jobs report for July – with 528,000 jobs added, rising wages and an unemployment rate that matched a half-century low of 3.5% – solidified expectations that the Fed will announce yet another three-quarter-point hike when it next meets in September. Robust hiring tends to fuel inflation because it gives Americans more collective spending power.

One positive sign, though, is that Americans’ expectations for future inflation have fallen, according to a survey by the Federal Reserve Bank of New York, likely reflecting the drop in gas prices that is highly visible to most consumers. Inflation expectations can be self-fulfilling: If people believe inflation will stay high or worsen, they’re likely to take steps – such as demanding higher pay – that can send prices higher in a self-perpetuating cycle. Companies then often raise prices to offset higher their higher labour costs. But the New York Fed survey found that Americans’ foresee lower inflation one, three and five years from now than they did a month ago.

Supply chain snarls are also loosening, with fewer ships moored off Southern California ports and shipping costs declining. Prices for commodities like corn, wheat and copper have fallen steeply.

Yet in categories where price changes are stickier, such as rents, costs are still surging. One-third of Americans rent their homes, and higher rental costs are leaving many of them with less money to spend on other items. Data from Bank of America, based on its customer accounts, shows that rent increases have fallen particularly hard on younger Americans. Average rent payments for so-called Generation Z renters (those born after 1996) jumped 16% in July from a year ago, while for baby boomers the increase was just 3%.

Stubborn inflation isn’t just a U.S. phenomenon. Prices have jumped in the United Kingdom, Europe and in less developed nations such as Argentina.

Source: Globe and Mail

US Retail Sales – July 2022

The pace of sales at U.S. retailers was unchanged in July as persistently high inflation and rising interest rates forced many Americans to spend more cautiously. Retail purchases were flat after having risen 0.8% in June, the Commerce Department reported. Economists had expected a slight increase.

Still, the report contained some positive signs: Excluding autos and auto parts, retail sales rose 0.4% in July. Lower gas prices likely freed up money for people to spend elsewhere. Gasoline sales slid 1.8%, reflecting the drop in pump prices. Sales of building supplies and garden equipment held up, as did sales at electronics and appliance stores. At the same time, consumers remained wary of spending much on non-essentials: Sales were down 0.5% at department stores and 0.6% at clothing stores. Compared with 12 months ago, overall retail sales rose 10.3% in July.

America’s consumers, whose spending accounts for nearly 70% of U.S. economic activity, have remained mostly resilient even with year-over-year inflation near a four-decade high, rising economic uncertainties and the surging costs of mortgages and borrowing money. Still, overall spending has weakened, and it has shifted increasingly toward things like groceries, and away less necessary things like electronics, furniture and new clothes.

Inflation continues to pose a severe hardship for many families. Though gasoline prices have fallen from their heights, food, rent, used cars and other necessities have become far more expensive, beyond whatever wage increases most workers have notched.

The impact of the Fed’s hikes has been felt especially in the housing market. Sales of previously occupied homes have slowed for five straight months as higher loan rates and high sales prices have kept many would-be buyers on the sidelines.

But the most important pillar of the economy – the job market – has proved durable. America’s employers added a hefty 528,000 jobs in July, and the unemployment rate reached 3.5%, matching a near-half-century low reached just before the pandemic erupted in the spring of 2020.

Source: Globe and Mail