MNI BOC ANALYSIS: CPI, Retail Sales Raise Upside Risk

By Yali N'Diaye

     OTTAWA (MNI) - Inflation and retail sales data released Thursday by

Statistics Canada raised the upside risk to both the inflation and growth

outlooks, and with it the odds of a more aggressive Bank of Canada, especially

if the performance repeats itself in the near future.

     Headline CPI rose 2.1% in November, above analysts' expectations of a 2.0%

12-month rate, after a 1.4% gain in October. Gasoline prices were the main

upward contributor, as analysts had widely expected, and the BOC is likely to

look through such impact.

     --HIGHER UNDERLYING INFLATION

     However, core inflation readings also moved up in November.

     CPI-median rose 1.9% after 1.7% in October, CPI-trim was up 1.8% after a

1.5% increase the previous month, both the highest rates since October 2016.

CPI-common ticked down to 1.5% from 1.6%.

     The overall range went to 1.5%-1.9% from 1.5%-1.7%, lifting the average to

1.7% from 1.6%.

     --RESILIENT HOUSEHOLD SPENDING

     The upside surprise was even stronger on the activity front, with retail

sales expanding 1.5% in October, the largest gain since January this year, and a

full point more than the 0.5% gain expected by analysts in a MNI survey.

     Further proof of the resilience of household spending core sales, excluding

autos and parts, also beat expectations with a 0.8% increase.

     Of the 11 major subsectors, seven posted higher sales, representing 79% of

retail trade. Regionally, gains were recorded in all provinces.

     And it was not a price story as sales volumes increased 1.4%.

     What also raises the upside risk to the outlook is that retail sales came

on the back of another upside surprise, this time from wholesale sales published

Tuesday, which also beat expectations by a full point with a 1.5% monthly

increase, supported by a 1.2% rise in volumes.

     The overall picture for October will be provided Friday when monthly GDP

data are released by Statistics Canada.

     --STRONGER BOC CONFIDENCE

     Such data should reinforce the BOC's confidence, which, according to a

speech by Governor Stephen Poloz delivered December 14, had already increased.

     Encouraged by the "tremendous" progress of Canada's economy this year,

Poloz told the Canadian Club of Toronto that the central bank is "growing

increasingly confident that the economy will need less monetary stimulus over

time."

     Since then, data have come in on the stronger side and the uncertainty

surrounding the outlook has diminished when it comes to U.S. tax policy since

the Tax Cuts and Jobs Act is now considered highly likely to be signed into law.

     Before giving up on trying to assess the impact of the U.S. tax cuts on

both the U.S. and Canadian economies, the BOC had assumed in its January

Monetary Policy Report "cuts to personal and corporate taxes amounting to a

cumulative 1.4 per cent of GDP" that would boost the level of U.S. GDP by about

0.5% by the end of 2018.

     Asked whether the estimated impact on growth had changed, a BOC press

representative told MNI it was "too early" to tell. "Bank staff are in the

process of assessing the potential impact of proposed U.S. fiscal measures and

will update our assumptions for U.S. growth in time for the January MPR."

     Still, the uncertainty about the likelihood of U.S. tax reforms actually

occurring, about the timing of implementation or their scope is now lifted.

     That being said, NAFTA-related uncertainties remain and should keep the BOC

on the cautious side until the outcome is clearer.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com