Friday's mixed Canadian economic data underline that we're still mired in a period where the key indicators must be taken with a large grain of salt. Or, more accurately, a large drop of oil.
Statistics Canada issued two key economic numbers Friday morning – inflation for April and retail sales for March – that headed in opposite directions. But the plunge in oil prices late last year and early this year places substantial asterisks on both of these indicators. And, in the case of the retail sales, it looks like we're still waiting for the biggest oil-shock shoe to drop.
First, inflation – which looked to be headed in the wrong direction in April. The overall consumer price index inflation rate slumped to a thin 0.8 per cent, down from 1.2 per cent in March and the slowest rate in 18 months. That's miles below the Bank of Canada's 2-per-cent inflation target, despite the central bank keeping its stimulative tap wide open with bargain-basement interest rates, which it cut even further as recently as January.
But the depressed inflation rate in recent months has been all about the oil plunge. Energy prices were down a massive 13.5 per cent in April from a year earlier, even bigger than the 10.4-per-cent year-over-year drop in March. Excluding energy, the inflation rate for the rest of the CPI was 2.2 per cent. Indeed, the ex-energy inflation rate has been above the central bank's 2-per-cent target for each of the past nine months.
Clearly, oil prices are a major, major distortion in the overall inflation numbers, and that will continue in the coming months, as the year-to-year comparisons evolve. The energy segment of CPI actually peaked in June of last year, and remained near that peak through September – but then fell off a cliff in the ensuing months. Anyone looking at the CPI numbers for the rest of the year will have to take a close look at not only what energy prices are doing this year, but also what they did last year at the same time, to get a realistic picture of the inflation trend and oil's heavy influence on it.
Meanwhile, Statscan reported that Canadian retail sales rose a tidy 0.7 per cent in March from February, the second straight increase and well above the 0.3-per-cent increase that economists had anticipated. And if you factored out gasoline stations, which fell 0.5 per cent in the month (and a whopping 17.4 per cent from a year earlier) as they continued to be bogged down by weak oil prices, the sales looked even better, up 0.8 per cent.
On the surface, it looks like the Canadian consumer is weathering the oil shock very well; indeed, the numbers lend support to the argument that cheaper fuel prices are a positive for consumers, putting more disposable income in their pockets to shop for other things.
But there's one thing that's hard to reconcile in this story, and that's the curiously strong performance of Alberta. In what is supposed to be the epicentre of the oil shock, how is it that retail sales were up a robust 1.1 per cent in March, on top of a 1-per-cent rise in February? I know Albertans are a resilient bunch, but can they really be sloughing off the shock this well?
The short answer is, probably not. It's more likely that much of the shock hasn't hit consumers yet.
Bank of Canada Governor Stephen Poloz pointed out in a speech last week that when it comes to big economic disruptions such as an oil shock, employment tends to be one of the last things to feel the hit. Prices get hit, then companies cut back, suppliers feel the pinch, and eventually this results in people getting laid off. It's notable that according to Statscan's April labour force survey, Alberta has actually gained 14,000 jobs so far this year.
But as Mr. Poloz said, the full impact on employment hasn't hit yet – and Alberta will almost certainly feel the brunt of that. And when it comes, that will eventually translate into consumers with less to spend, and, thus, a significant drag on retail sales. Even as recovering oil prices might prop up gasoline stations' contribution to the retail numbers, the lingering effects of the oil shock on jobs probably mean the retail numbers will face a serious challenge in the coming months – despite the strength they seem to be showing now.