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Canada rejigs inflation measures for post-pandemic life

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A year into the pandemic, Canada‘s national statistics agency is updating how it measures inflation, using new types of data for the first time as it bets on what lockdown spending shifts will prevail even as life returns more to normal.

Statistics Canada‘s overdue re-weighting of its consumer price index (CPI) basket, set for release with June data, could give another bump to inflation which is already running hot. It also has implications for real return bonds, which compensate investors for changes in CPI.

“It’s something that people are paying attention to … because of how odd the period preceding it was,” said Royce Mendes, senior economist at CIBC Capital Markets.

“If it puts more weight on something that generally has a higher inflation rate, and takes away some of the weighting on things that just generally over many years have lower inflation, you are going to see the monthly numbers perk up,” he said.

Statscan rejigs the weights of its CPI basket on a semi-annual basis, with the 2021 update delayed by six months due to the COVID-19 pandemic.

For the first time, the agency is using real world inputs – like price scanners at grocery stores – and actual consumer outlays, along with its traditional survey of household spending, to determine the new weightings.

The Bank of Canada targets inflation at 2%, with a 1%-3% control range. The central bank has said it expects inflation to be near the top end of its target band over the next few months due to the base-year effect, before dropping to around 2% later in 2021.

In April, inflation rose at its fastest pace in a decade to 3.4%, mostly due to the statistical comparison to last year when prices tanked during early pandemic shutdowns.

Statcan’s alternate index, weighted to better reflect the impact of spending shifts due to the pandemic, has consistently tracked above official inflation. Canadians spent less on gasoline and travel in 2020, for example, but more on food and housing.

Key to the rejig is a bet on just how much the pandemic shift in consumption habits will stick as vaccines roll out and Canadians return to a more normal life.

“For all we know we could go back to the same spending patterns we had before the pandemic,” said Derek Holt, head of Capital Markets Economics at Scotiabank. “I don’t think so – I don’t think we’ll all be boarding cruise ships and packing movie theaters anytime soon, but maybe we will.”

For bond investors, the tricky thing will be judging how a basket shakeup will change headline numbers, either up or down, particularly as some of the components that could be reduced in weight face sharp price rises as the economy reopens.

“Air fare inflation is going to be pretty high for the next year,” said Stephen Brown, senior Canada economist at Capital Economics. “So if they reduce the weight of airlines they’d actually be reducing headline inflation by doing that.”

 

(Reporting by Julie Gordon in Ottawa and Fergal Smith in Toronto; Editing by David Gregorio)

Economy

Canadian retail sales slide in April, May as COVID-19 shutdown bites

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december retail sales

Canadian retail sales plunged in April and May, as shops and other businesses were shuttered amid a third wave of COVID-19 infections, Statistics Canada data showed on Wednesday.

Retail trade fell 5.7% in April, the sharpest decline in a year, missing analyst forecasts of a 5.0% drop. In a preliminary estimate, Statscan said May retail sales likely fell by 3.2% as store closures dragged on.

“April showers brought no May flowers for Canadian retailers this year,” Royce Mendes, senior economist at CIBC Capital Markets, said in a note.

Statscan said that 5.0% of retailers were closed at some point in April. The average length of the closure was one day, it said, citing respondent feedback.

Sales decreased in nine of the 11 subsectors, while core sales, which exclude gasoline stations and motor vehicles, were down 7.6% in April.

Clothing and accessory store sales fell 28.6%, with sales at building material and garden equipment stores falling for the first time in nine months, by 10.4%.

“These results continue to suggest that the Bank of Canada is too optimistic on the growth outlook for the second quarter, even if there is a solid rebound occurring now in June,” Mendes said.

The central bank said in April that it expects Canada’s economy to grow 6.5% in 2021 and signaled interest rates could begin to rise in the second half of 2022.

The Canadian dollar held on to earlier gains after the data, trading up 0.3% at 1.2271 to the greenback, or 81.49 U.S. cents.

(Reporting by Julie Gordon in Ottawa, additional reporting by Fergal Smith in Toronto, editing by Alexander Smith)

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Economy

Canadian dollar notches a 6-day high

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Canadian dollar

The Canadian dollar strengthened for a third day against its U.S. counterpart on Wednesday, as oil prices rose and Federal Reserve Chair Jerome Powell reassured markets that the central bank is not rushing to hike rates.

Markets were rattled last week when the Fed shifted to more hawkish guidance. But Powell on Tuesday said the economic recovery required more time before any tapering of stimulus and higher borrowing costs are appropriate, helping Wall Street recoup last week’s decline.

Canada is a major producer of commodities, including oil, so its economy is highly geared to the economic cycle.

Brent crude rose above $75 a barrel, reaching its highest since late 2018, after an industry report on U.S. crude inventories reinforced views of a tightening market as travel picks up in Europe and North America.

The Canadian dollar was trading 0.3% higher at 1.2271 to the greenback, or 81.49 U.S. cents, after touching its strongest level since last Thursday at 1.2265.

The currency also gained ground on Monday and Tuesday, clawing back some of its decline from last week.

Canadian retail sales fell by 5.7% in April from March as provincial governments put in place restrictions to tackle a third wave of the COVID-19 pandemic, Statistics Canada said. A flash estimate showed sales down 3.2% in May.

Still, the Bank of Canada expects consumer spending to lead a strong rebound in the domestic economy as vaccinations climb and containment measures ease.

Canadian government bond yields were mixed across a steeper curve, with the 10-year up nearly 1 basis point at 1.416%. Last Friday, it touched a 3-1/2-month low at 1.364%.

(Reporting by Fergal Smith; editing by Jonathan Oatis)

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Economy

Toronto Stock Exchange higher at open as energy stocks gain

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Toronto Stock Exchange edged higher at open on Wednesday as heavyweight energy stocks advanced, while data showing a plunge in domestic retail sales in April and May capped the gains.

* At 9:30 a.m. ET (13:30 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was up 16.77 points, or 0.08%, at 20,217.42.

(Reporting by Amal S in Bengaluru; Editing by Sriraj Kalluvila)

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