The Twenty-Four
The Weekly Wrap, May 24, 2024
Inflation cools, but cumulative effects weigh
By Mark Parsons, ATB Economics 24 May 2024 10 min read
In this week’s ATB Economics Weekly Wrap…
- Cutting back - Retail spending
- Southern waiting - U.S. Fed needs more time
- BoC looking for even more? - Core inflation cooperating in Canada
- More people - Broad-based population growth in Alberta
- Productivity pullback across Canada
- Interesting Fact: Record temporary resident population
- Chart of the Week: Inflation’s cumulative impacts
It was a busy data week! We finally got population estimates this week for areas smaller than the provinces and they confirm that, while Alberta’s explosive population growth has been widespread, the pace has been particularly fast in Calgary and Edmonton. As outlined in a report we released on Wednesday, a big part of the population story is relative affordability of housing in Alberta in addition to stronger job growth. This morning we got retail sales data for March that, when combined with our ATB Consumer Tracker, show that Alberta consumers are continuing to rein in their spending. There was a new inflation report and 2023 data that shows declines in labour productivity across Canada.
Cutting back - Retail spending in Alberta
We weren’t expecting much from the consumer this year. Lagged impacts of higher rates are in full force, and three years of high inflation have eroded purchasing power.
Not surprisingly, it’s been a slower start to the year for retail sales. Data released this morning show that Alberta retail sales improved in March, but are still down in the first quarter by 2.2% compared to the same quarter last year. Keep in mind, though, that sales spiked in early 2023. Monthly sales have not come close to January’s 2023 highs (on a seasonally adjusted basis).
Declines were concentrated in the transportation department - motor vehicles and gasoline. Excluding these two categories, “core” sales were actually up 3.3% in Q1 from a year ago.
Our more timely ATB Consumer Index (the value of Mastercard transactions) reinforces this trend, and suggests that consumer spending likely cooled in April.
We expect to see some improvement in the second half of the year, coinciding with the pivot to lower interest rates and easing inflation. But overall expectations are modest. We see real consumer spending advancing only 1.5% (a 1.8% decline on a per capita basis) based on our March forecast, which is consistent with recent readings.
Seasonally-adjusted retail sales in Alberta edged up slightly in March 2024
U.S. Fed not taking its eye off the inflation ball
Weak economic growth in Canada, a softening labour market and a trend back towards 2% inflation has many observers (including us) expecting a rate cut in June or July.
We believe the Bank could easily justify a cut in June based on the core inflation readings, but there’s a good chance they proceed cautiously (gather more data, release a new forecast) and move in July.
It’s a different story south of the border. Released on Wednesday, the minutes of the most recent meeting of the Federal Open Market Committee* indicate that, even though inflation in the U.S. has eased over the past year, participants feel there has been “a lack of further progress toward the Committee’s 2% objective” and that “the disinflation process [will] likely take longer than previously thought.”
Both analysts and markets have rolled back their expectations for rate cuts by the Fed this year from up to six cuts to maybe two with the first one not coming (if it even does) until the fall.
*The 12-member Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System that sets the direction of U.S. monetary policy. A joint meeting of the FOMC and the Board of Governors of the Federal Reserve System was held on April 30-May 1, 2024.
Inflation progress in Canada, but prices are still very high
It’s tempting and completely understandable to treat any suggestion that inflation is cooling with a healthy dose of suspicion. Inflation has been high for so long, no one wants to jump the gun and declare victory.
But April’s inflation report looked good from a variety of angles. Headline annual inflation in Canada eased to 2.7% despite an acceleration in gasoline prices. Grocery prices - long the culprit - grew only 1.4% year-over-year (y/y) last month. And most importantly for the Bank of Canada, the two main core inflation readings eased again and are now below 3% y/y. It’s even better when removing year-ago base period effects - the month-over-month changes in the three-month moving average were below 2% annualized.
It’s mainly a shelter cost problem now, and the Bank is no doubt concerned that lowering rates could add to these price pressures as prospective buyers come off the sidelines. But delaying hurts on the supply side as well as homes need to be built. The Bank’s target is 2% overall inflation, but it will be interesting to see how it responds to the shelter component. CPI excluding shelter is sitting at only 1.2% y/y.
Here in Alberta, the headline inflation rate declined for the second straight month, easing from 3.5% y/y in March to 3% in April. Excluding energy and food prices, Alberta’s core inflation rate was 2.6% (vs. 2.7% nationally). Rents are rising faster here, driven by a tighter housing market and interprovincial migration.
Recall that electricity prices were a big driver of Alberta inflation last year. With government rebates and caps no longer in the base period and electricity prices easing, expect to see some y/y declines in electricity prices in the coming months.
While price growth is moderating, don’t expect consumers to be celebrating just yet. That’s because prices in levels are so much higher now than three years prior (see chart of the week).
Broad-based population growth
Yesterday’s Owl was focused on recent population growth in our census metropolitan areas* (CMAs) last year.
Calgary led the pack at an impressive 6.0% spike between the end of June 2022 and the start of July 2023 (this may seem like old news, but we just got the sub-provincial data this week). That translates into a gain of 96,000!
How big was the increase in Calgary? Consider the economic boom between 2011 and 2014, and the previous period of strong interprovincial migration. In the peak year, Alberta’s entire population grew 106,600 in 2013. Calgary by itself almost matched that in 2023.
Edmonton’s gain was also strong at 63,000 people (+4.2%). For context, that exceeds Alberta’s entire annual increase in each year between 2016 and 2021.
Now let’s look at the communities that are home to the 1.2 million Albertans who do not live in a CMA.
Smaller urban centres (a.k.a census agglomerations** or CAs) are home to 408,000 people or about 9% of Alberta’s total population. As a group, their population grew by 2.2% last year. Slower than the 5.0% pace for Alberta’s CMAs but 3.5 times faster than the average over the previous five years (0.6%) and a titch ahead of all CAs in Canada (which grew by 2.0% last year).
*A census metropolitan area (CMA) is formed by one or more adjacent municipalities centred on a population centre (known as the core). A CMA must have a total population of at least 100,000, based on data from the current Census of Population Program, of which 50,000 or more must live in the core.
**A census agglomeration (CA) is formed by one or more adjacent municipalities centred on a population centre (known as the core). A CA must have a core population of at least 10,000.
Canmore posted the strongest growth of Alberta's 13 CAs last year
What about the areas outside the CMAs and CAs? As a group, the population of these areas posted growth of 1.1% last year (matching the national average for growth outside CMAs and CAs) to reach almost 800,000 or 17% of Alberta’s total population. As such, last year’s growth was well above the 0.2% increase seen in 2022 and the 0.1% decrease posted in 2021.
Conveniently, the Alberta Government uses the data from Statistics Canada to produce a handy population table for the over 400 municipalities in the province. The fastest growing community with at least 1,000 residents last year was Banff at 10.5% followed by Chestermere at 8.1% and Picture Butte at 6.9%.
There were 40 Alberta municipalities with populations over 1,000 that saw their population shrink last year according to the latest estimates. While not every community in Alberta grew last year, most (62% of the 413 for which we have valid data) did.
Bottom line: Population gains were concentrated in the CMAs, particularly Calgary. But what we saw last year was fairly broad-based - faster than normal growth across the province.
Labour productivity down for third year in a row
Labour productivity* in Canada’s business sector fell by 2.2% last year, with declines widespread across all ten provinces. This means hours worked outpaced output gains.
Why does this matter? As the Bank of Canada’s Senior Deputy Governor Carolyn Rogers said in her recent “break the glass” speech, because “strong productivity…leads to faster growth, more jobs and higher wages [and] is an important way to protect the economy from the risks of high inflation.”
Business sector labour productivity in Alberta fell by 2.3% last year, led by declines in the goods-producing sector.
Despite the decline, Alberta had the highest level of labour productivity at $77.1 per hour (2017 dollars) among provinces, well above the national average of $63.6.
As we’ve highlighted, Alberta’s productivity advantage is mainly a function of its unique industry structure with more workers in energy and related sectors (where productivity levels are higher), and to a lesser extent higher general levels of productivity across sectors.
More to come from ATB Economics on provincial productivity. Stay tuned.
*Labour productivity is a measure of real GDP per hour worked. Productivity gains occur when the production of goods and services grows faster than the volume of work (in this case hours) dedicated to their production.
Business sector labour productivity has been falling in both Alberta and Canada
Interesting Fact: The spike in non-permanent residents
Non-permanent residents (NPRs)* have been a key part of Canada’s and Alberta’s recent population growth stories. Nationally, Canada gained almost 700,000 residents last year (July 1, 2022 to June 30, 2023) from the net flow of NPRs in and out of the country. Last year’s gain was over 3.5 times the previous record set in 2022 (the data series goes back to 1972).
In Alberta, the net gain from NPRs last year was over 63,000 or about 3.2 times the previous high set back in 2009.
Why so many more NPRs? We know there has been an increase in asylum claimants and Statistics Canada updated its methodology for estimating NPRs, but the impact of these factors is small. The bulk of the increase is due to more people coming to Canada under work and study permits.
As we’ve noted, the federal government has announced lower targets for non-permanent residents. With a much lower proportion of international students and temporary foreign workers, Alberta should be less impacted than other provinces. More details about the targets are expected in the fall.
*A non-permanent resident refers to a person from another country with a usual place of residence in Canada and who has a work or study permit or who has claimed refugee status (asylum claimant, protected person and related groups). Family members living with work or study permit holders are also included unless these family members are already Canadian citizens, landed immigrants (permanent residents), or non-permanent residents themselves.
Chart of the Week: Cumulative impact of higher inflation
When I mention that inflation is coming down, I often get funny looks. Kinda like, when’s the last time you were at the grocery store?
I get it. Prices are still very high, they just are growing at a slower rate. Perhaps that’s why perceptions of inflation are higher than the actual readings.
One way to look at this is the cumulative impacts of inflation over a longer stretch. The price level, as measured by the Consumer Price Index, is 14.2% higher in Alberta than exactly three years ago (just under the national average of 14.5%), with food prices 20% higher and shelter costs 23% higher.
No wonder consumers and businesses continue to feel the pinch, even as inflation grinds lower.
The Consumer Price Index in Alberta was 14.2% higher in April 2024 than in April 2021
Answer to the previous trivia question: According to the U.S. Census Bureau, there were 8.1 million people living in the Dallas-Fort Worth-Arlington Metro Area as of July 1, 2023.
Today’s trivia question: What is the population of the Edmonton Census Metropolitan Area?
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