Weak Retail Sales Result Makes Canada Rate Cut More Likely

(Bloomberg) -- Canada’s retail sales unexpectedly fell and the inflation rate trailed forecasts, raising concern about the health of the country’s economic rebound.

Retail sales fell 0.1 percent in August, compared with forecasts for a 0.3 percent gain. Consumer inflation accelerated for the first time in five months in September to 1.3 percent, however the jump was below the 1.4 percent rate economists were forecasting.

The report comes after Bank of Canada Governor Stephen Poloz marked down his inflation forecast Wednesday and said policy makers discussed cutting interest rates because of a deteriorating growth outlook. Poloz had pinned some hope on the effects of fiscal stimulus, however Friday’s retail sales data shows the impact of higher child benefits may not be filtering through to the broader economy.

“Add it all up, and the door for a rate cut that the Bank of Canada opened up this week got a tad wider still, although it will take more than one or two soft figures to propel a move,” Avery Shenfeld, chief economist at CIBC World Markets, said in a note to investors.

The Canadian dollar fell 0.7 percent following the report to C$1.3325 per U.S. dollar at 8:52 a.m. Toronto time.

Inflation hasn’t exceeded 2 percent for about two years, and other parts of the report signaled prices aren’t about to surge past that target.

The bank’s forecast is for the temporary drag of cheaper gasoline to fade and carry inflation back toward its 2 percent target, a process being frustrated by slack in the economy.

Gasoline Prices

The core inflation rate excluding eight volatile products and some taxes remained at a two-year low of 1.8 percent.

Gasoline prices rose 0.8 percent in September on the month. That helped move the 12-month rate for prices at the pump to a

3.2 percent decline in September versus an 11.5 percent drop in August.

Excluding gasoline the inflation rate slowed to 1.5 percent from 1.7 percent, Statistics Canada said.

Economists surveyed by Bloomberg forecast the total inflation rate for September would rise 1.4 percent and core by

1.8 percent.

(Updates with economist’s comment in fourth paragraph.)