Forget Deflation. Stagflation Arrives in Canada

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Worst Plunge in Retail Sales since 2008. Inflation Whacks Consumers

Retail sales in Canada fell 2.2% in December from November on a seasonally adjusted basis, but not adjusted for inflation, to C$43.2 billion. “Declines were widespread as lower sales were reported in 10 of 11 subsectors, representing 97% of retail trade,” Statistics Canada said.

It blamed the weather. I mean, really. “Later snowfalls and unseasonably warm weather in many parts of Canada may have contributed to lower seasonal purchases.” It said this right after saying that the decline was widespread, and therefore beyond winter jackets, thermal underwear, and fuzzy earmuffs.

Motor vehicle sales dropped 3.9%, with sales at new car dealers falling 4.1%. In dollar terms, given the magnitude of motor vehicle sales, it was the largest decrease among all subsectors. But wait… “Unseasonably warm weather” in the winter is great for car sales, so they should have jumped!

On the other hand, the sub-category of “other motor vehicles dealers” includes snowmobiles, and there sales plunged 6.7%, down for the third month in a row. In this subsector of motor vehicle sales, the weather likely did played a role. But then, sales also fell 2.5% at used car dealers though warmer weather should have really helped them.

Which leaves us stumped about the weather excuse.

Then the really bad news, StatCan put it: “Store types typically associated with holiday shopping registered weaker sales in December,” with sales at general merchandise stores down 2.2%, falling for the second consecutive month in a row; clothing and accessory stores down 3.6%; electronics and appliance stores down 3.0%, the fourth month of falling sales in six; sales at sporting goods, hobby, book and music stores down 2.3%.

And it was spread across the country. Retail sales dropped in nine of the 10 provinces and in all 3 territories. Only exception: tiny Prince Edward Island, where retails sales were flat.

At first glance, on a year over year basis, retail sales didn’t look so bad, rising 2.6% from December 2014, propped up by British Columbia and Ontario where retail sales rose 7.1% and 5.1% respectively, but they plunged 5.5% in the epicenter of the oil bust and the third largest province, Alberta.

But then there’s inflation. Just when you thought that “deflation” was the biggest risk to the universe, per the prophetic pronouncements and incessant fear-mongering by our central bankers and their economists, it’s inflation that comes along and bites.

Statistics Canada reported today that the Consumer Price Index jumped a hotter than expected 2.0% in January from a year ago, even though energy prices still plunged. Food prices jumped 4% over the 12-month period; booze and beverages 3.1%. The cost of buying or leasing a passenger vehicle 3.9%. These are multi-year high inflation rates.

The Canadian dollar, which the Bank of Canada has been trying to crush with all its might, has made imports more expensive. And Canada imports a significant part of its foods from the US. It imports passenger vehicles from around the world. It imports a million other things that consumers buy and pay for with their crushed loonies.

And so, inflation is now at the highest rate since 2011 (chart by National Bank Financial’s Economics and Strategy):

Canada-CPI-2016-01

With inflation acting like this, consumers’ purchasing power takes a hit. And this has an impact on retail sales. Adjusted for inflation, retail sales were up a minuscule rounding error of 0.13% year-over-year. This chart by Statistics Canada shows retail sales in current dollars (blue line) and in “2007 chained dollars” (red line). I added the black horizontal line from December 2015 back to December 2014. And note the plunge in retail sales for the month of December – the worst since 2008:

Canada-retail-sales-current-dollars-inflation-adjusted-2015-12

The report by Economics and Strategy put it this way: “It was not a Merry Christmas for Canadian retailers. December’s volume slump was the worst in seven years.”

But just because retail demand is crummy doesn’t mean that retail prices can’t power higher. Stagflation comes to mind. Now happening before our very eyes. And forget deflation, however much central bankers bandy the term about like a cudgel to justify their monetary policies.

No wonder that Investor Sentiment hits the worst level since March 2009. Read…  Things Are Coming Unglued for Canadian Investors

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  29 comments for “Forget Deflation. Stagflation Arrives in Canada

  1. Nick
    Feb 19, 2016 at 6:26 pm

    You opening brings to my mind the philosophy of the health non-profit I work for . . . When we have an event in bad weather, well, the weather kept people from making it there; unfortunately, when the weather is good, they prefer to go to the beach.

    It’s always easy to find a reason for why something happened — but attendance at an event, like an economy, is the total of millions of decisions. When one underperforms, it has no ‘reason’ other than that not enough people found something they wanted at an acceptable cost.

  2. Willy2
    Feb 19, 2016 at 6:52 pm

    Stagflation hitting Canada ? No, that was something of the 1970s when wages rose (very) fast.

    • Feb 19, 2016 at 7:12 pm

      I was working in the 70s. I remember: wages were rising fast, but only to try to keep up with inflation which was also rising very fast. And real wages weren’t going anywhere. Meanwhile, the economy was stagnating.

      • Nick
        Feb 19, 2016 at 8:46 pm

        It would be great if wages rose! Better find a government job.

      • Willy2
        Feb 20, 2016 at 3:24 pm

        – Right !!!! And here’s how it worked. When inflation was say 8% then workers would receive an 8% (or more) wage increase. That allows producers to increase their prices by 8% as well. (that’s the source of the inflation).

        – From say 1980 onwards, workers would receive only say a 3% wage increase. Producers could increase prices by 8% but then they would lose (8- 3=) 5% of their demand. So, producers were forced to limit the increase of prices to 3% or otherwise lose turnover. And as a result inflation collapsed.

        – No. All these price increases (e.g. as a result of a rising USD/CAD) makes it more harder to get by with the same income. And that’s why these price inflation will ultimately lead to more Deflation.

        • robt
          Feb 21, 2016 at 4:43 pm

          Sadly many people believe because of political propaganda that price increases cause inflation. Price increases are a symptom of inflation, not the cause. If companies can make their expected rate of return supplying products the prices will not increase.
          An example, and one which affects all of us significantly, is that the price of gasoline is less than half in real terms what it was 100 years ago even taking into account the fact that additional onerous direct taxes are today included in these prices. Despite this, the political line is to demonize the oil companies.
          The cause of inflation is the expansion of the money supply, which has meant that what twenty cents bought you in 1913 requires ten dollars today.

  3. John Doyle
    Feb 19, 2016 at 7:01 pm

    What does one expect? There’s plenty of “stuff” for sale but few are buying. And everywhere, not just Canada. Mind you some things sell well, like ammunition.

  4. OutLookingIn
    Feb 19, 2016 at 7:09 pm

    Disposable discretionary income is just not there. Wages are stagnant. Employment is very weak/declining. Food price inflation is worse than what is reported. Housing (rents) have been steadily increasing. Insurance costs have also steadily risen. Fees and new fees are up.

    Food bank usage is increasing. Waiting lists for low income housing are now long and getting longer. Homelessness is on the rise. The middle class is now much smaller than in the past. Larger and larger segments of pensioners are now living below the poverty line.

    You see more evidence of older folks in the workforce, usually in an occupation that pays minimum wage and requires menial work. There is a sense of resignation and sufferance among the general populace. With a much reduced expectation that things will get “better” soon.

  5. d'Cynic
    Feb 19, 2016 at 7:20 pm

    I can tell you that Statistics Canada inflation numbers are a total BS. If they also counted housing inflation, it would be off the chart. So if gross sales declined, it is by a wider percentage that reported. Since the numbers do not reflect reality, we are metaphorically flying blind.

  6. Petunia
    Feb 19, 2016 at 7:32 pm

    The season, here in Florida, seems to have picked up since Xmas. The restaurants and stores seem much busier, a lot busier. Looks like the good old days. I’ve noticed some Canadians and they were all spending money. The traffic could also be because it is tax refund season. People are out all of a sudden. It is really noticeable. Much busier than Xmas.

    • Achilles4557
      Feb 19, 2016 at 7:59 pm

      That’s strange……because my father lives in Palm Desert on one of the finest clubs / courses—BigHorn—down there and he says many of the membership is very alarmed by how many Canadian members have put their places up for sale in the last 6 months. Although it makes sense because most the Canadian membership is/was from Calgary /Alberta….

      • Petunia
        Feb 20, 2016 at 11:34 am

        I had a garage sale last week and was trying to get rid of two sets of golf clubs. No takers. I was told by everyone who stopped by that nobody golfs anymore because they can’t afford it. Everybody who already had clubs said, they had really good ones they bought cheaply when the financial crisis hit. Almost everybody said they don’t golf anymore.

        A lady showed me an app with all the garage sales in my area, about twenty. It seems everybody is downsizing.

    • Mike R.
      Feb 19, 2016 at 8:42 pm

      Petunia,
      My Dad lives in central florida and reports the exact same thing. He has been astounded at the number of people down this time of year (compared to last couple of years). We’ve scratched our heads. Perhaps cheap gas prices allow retired folks to drive down and visit friends, etc. and free up discretionary $ for eating out. Not sure.

      But he owns small commerical rental buildings in three separate areas of Florida and for his several vacancies, hasn’t had a call in months. And he is very low cost because he’s owned them for decades. Confirms my suspicions about small biz across America. Getting wiped out slowly.

  7. Spencer
    Feb 19, 2016 at 10:54 pm

    …”of “other motor vehicles dealers” includes snowmobiles, and there sales plunged 6.7%”…

    With over thirty inches of snow in the past month, look, Ottawa population 850k, and, 1165 snowmobiles for sale.

    http://www.kijiji.ca/b-snowmobile/ottawa/c313l1700185

    Cheap fuel? I don’t think so! Over leveraged zombies trying to unload their junk. With the under water looney, that makes one of these suckers cheap by US dollars I reckon.

    Go ahead get one.

  8. Gian
    Feb 19, 2016 at 11:41 pm

    I live in a U.S. border city which relies heavily on the Canadian shopper. In 2015, there was a significant decline in the number of border crossings (minus 2.5 million). Although it seemed, at least from a local resident’s perspective, that the decrease was negligible on the economy. This is not the case since the beginning of this year however. Stores and restaurants are empty and/or closing and border crossings continue to decline. It’s going to be a rough year!

    • Cameron
      Feb 21, 2016 at 10:19 pm

      I don’t know why anyone could be surprised at that.

      Look at the current US dollar – Canadian unit exchange rate.

      1.38 CAN to buy 1 USD as I write and it will probably get worse as financial conditions deteriorate further and there is a greater rush back to the relative safety of USD.

  9. Islander
    Feb 20, 2016 at 12:42 am

    This is a bit off topic, but I’d like to suggest a new indicator for anyone who is interested in current economic conditions in China. Because unlike this trustworthy Canada sales data, China makes it very hard to track what is happening in it’s economy. Its almost as if China views such data as needing to be covered up in a fog of war.

    But China does produce an actual fog, air pollution, which is directly tied to its economy. When the Olympics happened, their factories shut down for a week around the stadia, and the air cleared instantly. Air pollution is directly tied to the level of economic activity, and unlike electricity consumption, sales taxes or banking statistics these data streams are publicly available, accurate and sensitive. Here’s a link to US dept of state data archive going back to 2012, which shows some interesting trends.

    Wolf, what do you think?

    • Islander
      Feb 20, 2016 at 12:42 am
    • Feb 20, 2016 at 1:11 am

      This is surely an interesting indicator to follow, especially if you live there and breathe the air.

      But pollution per se is not an indicator of economic activity. For example, a modern efficient natural gas plant and an old inefficient coal plant can produce the same amount of electricity (output), but one does it with minimal pollution, the other belches the worst crap into the sky.

    • Nicko
      Feb 20, 2016 at 2:55 am

      From BBC world:

      “China has removed the head of its securities regulator as the country tries to tackle major volatility in its stock markets.

      Xiao Gang was replaced by Liu Shiyu as the chairman of the China Securities Regulatory Commission (CSRC), state media report.

      Mr Xiao was in charge when China’s bourses crashed in mid-2015.

      At one point the Shanghai and Shenzhen stock exchanges lost as much as 40% of their value.

      In January, China suspended its new “circuit-breaker” mechanism, which was designed to stop free-falling prices.”

      See! Nothing Wrong in China, everything’s PERFECTLY fine. Pay no attention to the men behind the curtain. ;)

    • d
      Feb 20, 2016 at 3:07 am

      Lot of variables: enforced industrial shuts. cleaner power stations as Wolf iterated, cleaner vehicles locomotives, Etc.

      In combination with other data Ie inbound outbound shipping. Could be a support BS indicator.

      As china moves more inbound and outbound onto its own carriers (one reason it is still supplying funds and ships to its carriers in a shipping glut as it aims to bankrupt some or all of the European carriers) this set of numbers will also become questionable. Without confirmation from suppler and destination ports.

    • Sara
      Feb 20, 2016 at 11:22 am

      How’s the fog in China will be a question of economic indicator in regards to production and supply a availability, I’d think.

  10. Jonathan Vause
    Feb 20, 2016 at 3:21 am

    in Guangzhou, at least, air pollution seems to have been significantly lower for the last 12 months, coincidentally ever since the state council made tackling air pollution a higher priority. I’m with wolf on this one tho, it might say sth about heavy industry output, but that’s becoming a smaller and smaller component of GDP, especially away from the old rust belt in the north (which is where the inevitable slowdown will be felt the hardest, of course)

  11. Paulo
    Feb 20, 2016 at 10:44 am

    I’ve got money to spend, but don’t. I wrote the other day about ‘sticker shock’, and find that I just can’t bring myself to buy much of anything these days when I feel ripped off.

    I have a 30 year old Toyota 4X4. It runs perfectly well but was pretty much at the end of its life. If I replaced it with something newer, it would cost me $35-45,000.00. Well, instead I spent a thousand on steel and parts and am almost done rebuilding it, from the frame to a new deck….all repaired, welded, and painted. This spring I will go to a local autobody shop that likes to do cash jobs on weekends and I will pay for the one thousand dollar ‘splash’ job on the cab, which will make it virtually brand new to the eye.

    Spent $2,000 and saved $35,000. I like those numbers. Furthermore, I’m shooting for 40 years ownership.

    Now, I know a local dealership owner and he has a fantastic mansion. He is wealthy beyond imagination. I ask myself, why do people add to his wealth buying stuff to replace things that could and should be repaired? If that’s the ‘economy’, we need to do things differently going forward.

    Yes, there is stagfaltion. I have been through it before in the 70’s when I started out life with a new family at 22. I survived it and prospered by working harder and saving more, which is what people are doing now. If some stores and dealerships suffer along the way, well maybe those products and services were actually unnecessary. (Do we need soap and specialty tea shops in a real world? Party shops?) I don’t think so.

    • Petunia
      Feb 20, 2016 at 11:54 am

      Paulo,
      The longest I ever owned a car was 14 years, a 94 Mustang. It only had 45K miles when I traded it in and it needed work. I didn’t want to spend the money and I don’t miss it. It actually is a terrible car to drive in the rain or snow. Don’t ever buy one for your kids or any inexperienced driver.

      I hope you understand that not everybody is as talented and focused as you are. As a woman, I can’t get an oil change without getting ripped off. Yes, I know they are overcharging me, but I get tired of arguing with guys who go to church on Sunday and do this stuff anyway. The AC went on our last car and it cost $600+ to fix. No, you can’t drive without it in Florida, I tried. I am never going to fix my own car and sometimes it is better to buy new.

  12. Shawn
    Feb 20, 2016 at 4:18 pm

    “But hey, we the people of Vancouver and Toronto are so special, we all live in 2 million dollar houses. There is no housing bubble, thanks to the Chinese. No crash in 2008! House price will always go up up up, because we are great and special.”

  13. Mick
    Feb 20, 2016 at 6:29 pm

    Retail sales are down AlOT more than 2%. Stores are closing and vacancies are getting even worse.

    This doesn’t happen for a meager 2%

    Government statistics….Pfft!

    • Willy2
      Feb 20, 2016 at 7:20 pm

      Perhaps they were talking “Same store sales”.

  14. Kreditanstalt
    Feb 21, 2016 at 8:57 pm

    I hardly ever buy any of that shit…it’s ‘disposable income’ stuff, and I don’t have any of that.

    Price inflation…but not a MENTION of food, energy, or taxes…

Comments are closed.