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The Quick Take: July 20, 2018

Retail Sales Rebound and Inflation Moves Higher

Alicia Macdonald
Principal Economist
National Forecast

“After a disappointing April, retail sales bounced back in May. Price growth also accelerated last month with consumer prices up 2.5 per cent in June. While the data released this morning paints a positive picture of the Canadian economy, we continue to expect that the Bank of Canada will remain on hold for the rest of the year.”

After falling in April, retail sales rebounded in May. Growth of 2.0 per cent was recorded in both real and nominal terms and the gain in sales volumes puts consumer spending back on track for decent growth in the second quarter.

The increase in retail spending was broad-based in May. After adjusting for inflation, there was strong sales growth in motor vehicle and parts, building material and garden equipment, and general merchandise stores.

Inflation reached 2.5 per cent in June after posting growth of 2.2 per cent in May. This is in line with the Bank’s latest forecast that expected third and fourth quarter inflation of 2.5 per cent owing to factors such as higher gasoline prices, minimum wage increases, exchange rate passthrough, and the impact of tariffs.

Indeed, headline inflation continues to be heavily influenced by gasoline prices. The consumer price index excluding gasoline showed growth of just 1.6 per cent in June.

Another factor continuing to put upward pressure on inflation is mortgage interest costs, which were up 4.5 per cent in June—the strongest growth in that component since early 2009.

While overall inflation accelerated last month, core inflation held relatively steady. Two of the Bank of Canada’s core measures of inflation were sitting at 2.0 per cent in June while CPI-common remains at 1.9 per cent.

The Bank of Canada has indicated that it will make future policy decisions based on incoming data and the data released this morning paints a positive picture of the Canadian economy. While this morning’s retail report was unambiguously strong, there is still a lot of economic data that will be released between now and the Bank’s next interest rate decision and significant risk remains on the trade front. For now, we continue to expect the Bank to remain on hold for the rest of the year as outlined in our recent Canadian Outlook.

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