January inflation reading expected to creep higher

Economists are expecting an increase in January's Canadian inflation rate later this week, and for figures to show that retail sales ended 2016 on a mixed note.

The report on the consumer price index will come Friday, two days after Statistics Canada reports on December retail activity.

The consensus forecast of economists is that the year-end retail sales report will show a 0.2 per cent month-over-month increase. Factoring out auto sales, observers expect the report will show a bigger gain of 0.8 per cent.

BMO offered a slighter weaker forecast, projecting overall sales to be as flat auto sales give back gains made in November.

"Canadian shoppers likely took a breather in December after a strong run over the prior few months," said Benjamin Reitzes, senior economist at BMO Capital Markets, in a commentary.

CIBC Capital Markets economist Nick Exarhos said auto sales are going "to spoil" the overall report, which he expects will show a 0.2 per cent decline in retail sales for the month.

However, he said higher gasoline prices that Canadians paid at the pump should show that retail sales rose by 0.5 per cent, once auto sales are factored out.

Energy prices expected to push inflation higher

The more closely-watched piece of economic data will come in the form of the consumer price index released at the end of the work week. The consensus of economists is for January's reading to show a month-over-month rise in prices of 0.3 per cent, and a year-over-year increase of 1.6 per cent.

"Canadian consumer prices likely jumped in January, as energy prices continued their upward march in the month," said Reitzes. "January is the start of a seasonally strong period for CPI, as most of the annual increase in prices generally comes in the first five months of the year."

Mainly due to to rising gasoline prices, CIBC expects the year-over-year inflation increase to come in at 1.9 per cent "after a long time undershooting the Bank of Canada's target." The central bank's stated goal is to keep overall inflation at two per cent, the middle of its target range of one to three per cent.

However, some economists don't think the expected rise in inflation will cause much concern for the Canada's central bank.

"For the Bank of Canada, this is mostly noise, as the substantial slack in the economy, including tame wages, gives them comfort that inflation will be well contained ahead," Avery Shenfeld of CIBC Capital Markets said in a commentary.