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Posted Tuesday April 23, 2019


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Retail Sales

An upside surprise, though signs of stagflation emerging

Retail sales surprised to the upside in February, rising by 0.8% compared to the consensus expectation of a 0.4% gain; Much of the increase in the month was due to higher prices; real retail sales posted a small gain; Overall, real retail sales have been flat for several months, while prices are starting to rise, in part, owing to tariffs on US imports - By David Watt

Facts

Retail sales rose by 0.8% m-o-m in February. This was higher than the consensus expectation of a 0.4% increase. Sales excluding autos were also higher than expected, rising by 0.6% m-o-m (consensus: 0.2%).

Higher retail prices were the main factor behind the increase in the value of retail sales in the month. In February, retail prices were up by 0.6%, led by service stations, home furnishings, groceries, and shoes. From a year ago, retail prices are up by 0.2%.

Real retail sales rose by 0.2% m-o-m, led by a 0.9% increase in sales of motor vehicles, and an increase in sales at service stations. Real retail sales excluding autos and service stations (core retail sales), which account for almost two-thirds of the total, fell by 0.2%. From a year ago, real retail sales are up by 1.7%.

Implications

In our view, today's report shows that there is little momentum in real retail sales, while retail sales prices are under some upward pressure. Overall, we see hints of a stagflationary environment starting to emerge.

Real retail sales have been essentially flat since May 2018, and have been range-bound since early 2017. Looking ahead, we think that the y-o-y rate of growth of retail sales will fall back toward zero in the next few months.

Meanwhile, the contributions of motor vehicles, service stations (gasoline), and other retail sales to the annual rate of change of retail prices. Note that gasoline has played a key role in the evolution of retail sales selling prices over the past two years. However, we are also now focusing on the contribution from the prices of other retail items (core retail sales). Notably, prices of groceries have increased by an average of 0.4% per month over the past nine months. Previously, the average change in grocery prices had been essentially flat over the prior three years.

The recent upward pressure on grocery prices reflects the pass-through of higher minimum wages in some locales, higher transportation costs (in part reflecting past increases in fuel costs), and higher tariffs on imports of some food products from the US. Note that in mid-2018, Canada imposed tariffs amounting to CAD16.6bn (USD 12.5bn) on imports from the US, including coffee, orange juice, yogurt, maple syrup, ketchup, salad dressing, and soups, among other products. These tariffs were in retaliation for US tariffs on Canadian steel and aluminium.

We also see retail prices facing more upward pressure next month. Gasoline prices rose by 11.6% in March. This suggests that service station prices are set to rise in the next retail sales report. Such a development could further squeeze household disposable incomes, and could place downward pressure on core real retail sales.

Overall, we observe upward pressure on retail sales prices, at a time when real retail sales have essentially stalled. Hence, we think that a potentially stagflationary environment is starting to become evident. In our view, this backdrop suggests that the Bank of Canada should take a very cautious approach in assessing the appropriate stance of monetary policy.

David Watt is Chief Economist, HSBC Canada









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