Canadian Retail Sales Squeezed by Higher Inflation

July 23, 2008

Total CPI inflation in Canada rose 3.1% in the year to June, more than double the 1.4% on-year pace in March.  A more acute sense of this acceleration can be observed in seasonally adjusted consumer prices, which advanced 4.5% at an annualized rate during the first half of 2008 compared to just 1.4% in the second half of 2007.  The 3.1% rise from June 2007 constitutes a 33-month high.  This sharp deterioration has been concentrated in energy and food, a common problem for many countries.  Energy costs went up 18.0% y/y in June, more than three times the 5.4% increase in the year to March.  Gasoline prices soared 26.9% y/y in June versus 7.9% in the year to March, while the rest of the CPI, that is every item except gasoline, advanced from 1.0% y/y in March to 1.8% last month.  Food prices jumped 1.0% m/m in June and 2.8% y/y, up from an on-year uptick of just 0.4% in March.

Consumer demand for energy tends to be insensitive in the short run to changes in prices.  Changing cars, driving distances to work, or homes is not easily or quickly done in response to higher gasoline costs.  What happens at first is that families end up with less discretionary income to be spent on other things.  Nominal retail sales in Canada advanced 2.8% in the year to May, down from 4.2% y/y in April and 4.6% in March.  Much of May’s increase, moreover, embodied higher prices for gasoline. Retail sales volumes went up merely 0.1% in May from April, ending a trend of brisker spending including volume increases of 0.5% in both April and March.  A real decline in sales in June would not be a shock given the additional jump of gasoline prices that month.  Real consumer spending had posted back-to-back increases of 4.3% in 2006 and 4.5% in 2007.  A rise of 3.2% saar in 1Q08 was lower but still respectable.



Comments are closed.