North American consumers are showing signs of emerging from hibernation in time for Christmas, pushing up inflation in Canada to a new two-year high and improving growth prospects for both economies.
Canada’s inflation rate rose a surprising half-point to 2.5 per cent in October, a sign the economy is not facing the imminent risk of a deflationary slump.
In conjunction with price firmness, Statistics Canada also reported Tuesday that retail sales jumped 0.6 per cent in September as consumers bought more cars and spent more on sporting goods, clothing, books and music.
The strength of the consumer was also evident south of the border, where the third-quarter gross domestic product was revised to 2.5 per cent from a previously reported two per cent.
The three data points are positive indicators for the North American economy — which had been under pressure over the past few months — and for retailers with Christmas shopping season approaching, said Douglas Porter, deputy chief economist with BMO Capital Markets.
“Today’s numbers do suggest the economy had a little more underlying momentum than previously believed,” he said. “The consumer spending numbers are not rock-and-sock’em, but they are solid.”
TD Bank’s chief economist Craig Alexander also doubted the better consumer spending data signalled a return to “booming” sales, saying the increase should be kept in context.
But the improvement was welcomed in Canada given recent soft data in other sectors of the economy, particularly manufacturing, exports, housing and employment.
Analysts were bracing for a potential drop in gross domestic product in September, but the retail numbers now suggest the month will come in positive.
And analysts now think Canada’s third quarter will see the economy advancing at about 1.5 per cent, below the two per cent growth of the second quarter but in line with the Bank of Canada’s expectations.
While that is one percentage point less than the U.S., CIBC chief economist Avery Shenfeld cautioned Canadians against making the comparison, since the American economy is starting from a much deeper hole.
“We have not had as deep a disinflationary trend as the U.S. and that’s a sign we’re not as many miles below full employment as the U.S.,” he said.
“They have a lot more catching up to do,” he added.
The key difference, say analysts, is that while Canada has recouped all the jobs lost during the 2008-09 recession, the U.S. has only brought back about 15 per cent of the almost nine million jobs that vanished.
Still, nothing in Tuesday’s numbers changes the established picture that the recovery will continue to be a long, arduous slog before the conditions return to the robust growth and strong job creation levels that existed prior to the crisis.
“Given all the concerns that continue to swirl around the global economy, I don’t think we should let down our guard just yet,” Porter said.
Analysts said it is unlikely the one-month consumer price jump will scare Bank of Canada governor Mark Carney into raising interest rates in the near future, in part because inflation is expected to moderate.
Breaking down the numbers, Statistics Canada said higher energy costs were responsible for about half of the inflation increase, but most things were noticeably higher in October.
Transportation costs rose 4.6 per cent, while shelter costs increased 2.8 per cent. Other gains included food, up 2.2 per cent, electricity 8.1 per cent, cars 4.9 per cent, car insurance 4.6 per cent, and property taxes by 3.5 per cent.
There were still some bargains, however. Clothing and footwear edged down 0.1 per cent from last year, mortgage interest costs retreated by three per cent, the price of computer equipment and supplies dropped 12.5 per cent, and air transportation and furniture were also lower.
Regionally, the two harmonized sales tax provinces continued to have among the highest inflation rates in the country, with Ontario leading the way at 3.4 per cent, half-a-point higher than in September, and British Columbia at 2.4 per cent.