CPI Figures Make BoC Rate Hike A Close Call
Sebastien Lavoie | May 18, 2018 12:26
CPI: Total CPI rose by a robust 0.3% month over month in April, in line with market expectations. Gasoline prices (+6.8% m/m) and telephone fees charged by telecom providers (+4.1% m/m) rose sharply. Food prices in restaurants increased by 0.4% in April after surging by 2% during the first three months of 2018; restaurant owners in Ontario are still passing on the steep minimum-wage hike to consumers.
Even though total CPI inflation edged down from 2.3% in March to 2.2% in April, the May 30th Bank of Canada monetary policy decision is likely to be a close call. First, this 2.2% figure is one of the strongest readings since the fall of 2014. Furthermore, two of the three core inflation measures watched closely by BoC officials rose by 0.1pp to 2.1%, close to matching the highest readings observed in the current business cycle (see chart). Finally, our breakdown analysis of the CPI also indicates a slow and steady generalized upward shift in inflationary pressures. Year-to-date, more CPI subcomponents increased at a faster pace compared with 2017 (see table below).
Retail Sales: The retail sales report for the month of March mostly contained more disappointing than positive news. The value of retail sales rose by a respectable 0.6% month over month. Supported by the recent increase in full-time employment and permanent positions, consumers’ confidence improved this year. Thus, auto sales surged for a second consecutive month in March (3.2%). Excluding autos, however, retail sales edged down for a second consecutive month (-0.2% m/m in April). Consumers notably scaled down their purchases of electronic, food and garden equipment products.
All in all, the year-over-year pace of growth in total retail sales stood at 3.5% for the first three months of 2018, half the pace registered in 2017 (+7.1%).
Bottom Line: Inflation remains within the BoC’s tolerance zone. Growth in both retail sales and household credit slowed during the first quarter of 2018 despite improving labour market conditions. Furthermore, the U.S., Canada and Mexico failed to reach a NAFTA deal this week. Altogether, we still think it is preferable for BoC officials to remain stay sidelines at the May 30th monetary policy decision meeting. This being said, this decision is likely to be a close call given that two of the three core inflation measures are now above the 2% target.
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