Lower-paid workers fell furthest behind
Canadian wage growth slowed to 2% in August, one percentage point below inflation, while new data shows households pulling back on spending.
Retail sales fell 0.7% to $73.7 billion in July, the first decline since December 2025, after a spike in gasoline prices tied to renewed hostilities in the Middle East.
Recent labour data shows those gains slowing. Average hourly wages rose 2.0% year over year in August, down from 2.8% in July and the slowest pace since November 2017 outside of 2021, Statistics Canada reported.
Consumer prices rose 3.0% in August, matching July's pace after 2.8% in June, which leaves wage growth one percentage point behind inflation. Excluding gasoline, prices rose 2.4%, and grocery prices rose 2.8%.
Statistics Canada's September 24 release showed Canadian retail sales declined in eight of nine subsectors, with volumes down 1.1%, after sales rose 0.6% to $74.2 billion in June. Sales remained 5.1% above July 2025's $70.1 billion.
Gasoline station and fuel vendor sales fell 0.9% in July, with volumes down 3.5%, while core inflation held at the 2% target.
Paycheques lose ground to prices
"Folks are feeling it.… The longer elevated inflation goes on, it will start eating into disposable incomes, especially if we don't see steady and strong wage gains supported by a healthy labour market," said Andrew Hencic, senior economist at TD Economics.
The slowdown in wage growth was sharper at lower pay levels, with hourly wages up 1.1% for the bottom 25% of earners versus 2.1% for the top quartile. Employment in wholesale and retail trade fell 55,000 over the 12 months to August.
The National Payroll Institute's 2026 survey found 44% of employed Canadians are financially stressed and only 18% believe their income increases are keeping pace with the cost of living. The institute estimates financial stress costs employers and the economy $74.3 billion in lost productivity.
Normandin Beaudry's survey of more than 800 organizations projects average salary increases of 3.1% for 2027, excluding freezes, or 3.3% with additional budgets.
Rate expectations draw mixed readings
Katherine Judge, executive director and senior economist at CIBC Capital Markets, expects sales volumes to grow at an annualized pace of about 4% in the third quarter, but wrote that a sustained pickup likely won't come until 2027, "and the (Bank of Canada) is therefore not going to hike rates in 2026."
The Bank of Canada held its policy rate at 2.25% on September 2, its seventh straight hold, and noted that long-term bond yields have risen globally, including in Canada. Economists expected rates to stay on hold through 2026.
Before the August inflation report, the two-year Government of Canada bond yield had risen more than 40 basis points in a month on expectations of rate hikes this year, according to TD Economics, which said the data did not support that degree of tightening.
Mercer's median solvency ratio for Canadian DB plans reached 128% at June 30, with 89% of plans at or above full funding.
Eight of nine subsectors slip
Core retail sales, which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers, fell 0.7% after a 1.2% gain in June, led by general merchandise retailers (-1.9%) and clothing, clothing accessories, shoes, jewelry, luggage and leather goods retailers (-1.2%). Building material and garden equipment and supplies dealers rose 0.8%.
Outside core sales, motor vehicle and parts dealers fell 0.8%, their first decline in four months.
Ontario posted the largest provincial decline in dollar terms at 2.0%, with Toronto down 4.7%, while British Columbia fell 1.4% and Alberta rose 1.4%. E-commerce sales dropped 3.5% to $5.5 billion, or 7.5% of total retail trade.
August estimate points upward
Statistics Canada's advance estimate, which will be revised, suggests sales rose 1.3% in August, based on responses from 57.8% of surveyed companies versus an 87.1% average final response rate.
Michael Davenport, senior economist at Oxford Economics, said third-quarter spending "remained fairly resilient given the global oil price shock."
Sébastien Mc Mahon, chief economist at iA Financial Group, said July's "payback" does not change the firm's "strong Canadian economy" story, citing accelerating goods exports outside the US.
Tariffs cloud the year-end outlook
The Section 338 tariffs that took effect in August could dampen spending through heightened uncertainty and weaker employment in some industries.
TD Economics forecasts annualized consumer spending growth of 2.6% in the third quarter, slowing to 1.4% in the fourth.
Russell Investments' BeiChen Lin said the tariffs cover about 5% of Canada's exports to the US, and Russell puts Canada's recession probability at 35% for the year ahead.
Statistics Canada will release August retail data on October 23.
