Treasury
CIBC Sees Canadian Consumer Spending Slowing or Even Stalling In Near Term, Rates On Hold
"Wherever the consumer goes, interest rates will typically follow," writes Andrew Grantham in this week's 'The Week Ahead' column from CIBC.That is especially the case in the current environment, as strength in spending would enable more companies to pass cost increases through to consumers, threatening the sort of broadening in inflationary pressures that would warrant a response from the Bank of Canada, Grantham says. Judging by recent retail sales figures, consumer spending on goods had its best quarter since late 2024 in Q1, and in per-capita terms it was the strongest performance since 2021, he adds.However, CIBC suspects that it is more likely that consumer spending will slow or even stall in the near term, which will make this pass through of inflationary pressure less likely and enable interest rates to remain on hold through 2026."For a start," Grantham says, "the recent surge appears to have been built on shaky foundations, raising the possibility that spending cools again or that past strength was simply statistical noise. Even before the recent surge in gasoline prices drove inflation higher, real disposable incomes had fallen during the final quarter of 2025 thanks to the effect that a weak labour market had on nominal incomes. Evidence so far this year, suggesting little job growth and a broadly sideways trend in unemployment, doesn't inspire confidence for a pick-up in aggregate incomes. Energy prices will likely have to remain high for an extended period to boost hiring and wages in that sector."But we already have to factor in the negative impact of the recent surge in gasoline prices, and on average since the start of March that surge has cost households the equivalent of roughly 0.7% of annualized aggregate incomes. While the temporary pause for the federal fuel excise tax is helping, it won't fully offset the squeeze from global oil prices unless we return to WTI at around US$75/bbl -- a long way from where we are today."There is another helping hand coming, with the federal government enhancing its benefit to low and modest-income households (and renaming it the Canada Groceries and Essentials Benefit) as well as providing a one-time payment in early June. For the households receiving this payment, it could well offset the damage that higher pump prices have caused to their pocketbooks so far. However, the aggregate figure, worth approximately 0.3% of disposable income, would fall short of offsetting the negative impact that higher gasoline prices are currently having on spending power."So overall, it appears more likely that household spending will slow again rather than continue its recent uptrend, and a quicker reduction in gasoline prices and/or further support measures from either the federal or provincial governments would be needed to take a more positive view. The advance estimate for March retail sales released today could already be the first indication of this slowing. While the 0.6% figure looked solid in nominal terms, it would likely represent little growth or even a modest decline in volume terms."For the upcoming week, the Bank of Canada will be in no rush to reach a definitive judgement regarding whether higher gasoline prices will flow through into broader inflationary pressure. The accompanying Monetary Policy Report will likely mimic the tone from March's meeting, forecasting a near-term spike in headline inflation but a much smaller and more gradual pick up in core inflation. Any improvement in the forecast for consumer spending will likely just reflect the upside surprise seen in Q1, rather than a more positive view regarding what lies ahead. And if what lies ahead turns out to be a much flatter trend in spending, interest rates likely won't need to go anywhere in 2026."
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