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Canadian retail sales fell more than expected in July, a sign that households are starting to pare back on purchases amid steep inflation and rapidly rising interest rates.

Retail sales dropped 2.5 per cent to $61.3-billion in July, exceeding a previous estimate of a 2-per-cent decline, Statistics Canada said Friday in a report. After removing the effects of inflation, sales fell 2 per cent in volume terms.

The figures were heavily influenced by gasoline, which tumbled 9.2 per cent in price that month. Sales at gas stations plunged even more – 14.2 per cent – as drivers cut back on quantities purchased.

Even so, it was more than just fuel. Core retail sales – which exclude those at gas stations and motor vehicle and parts dealers – fell 0.9 per cent. And the weakness was widespread: Nine of 11 subsectors – including supermarkets and furniture stores – notched lower sales.

In a preliminary estimate, retailers enjoyed a partial recovery in August, with sales nudging up 0.4 per cent.

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The numbers suggest consumers are growing more cautious and pulling back on purchases, a welcome development for the Bank of Canada. The central bank is quickly raising interest rates to curb excess demand in the economy and tamp down the highest inflation rates in decades. Financial analysts expect the bank to raise its policy rate – now at 3.25 per cent – at the next opportunity in late October.

Throughout much of this spell of steep inflation, Canadians were largely shouldering higher prices and not cutting back on how much they purchased, in volume terms. In total, households amassed hundreds of billions in excess savings during the pandemic, helping them to keep spending as price growth accelerated.

But Friday’s report showed that consumer behaviour is shifting as economic risks mount.

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“All in all, given the triple headwinds emanating from higher consumer prices, rapidly rising interest rates and a drop in wealth, consumers are becoming more frugal,” Toronto-Dominion Bank economist Ksenia Bushmeneva said in a note to investors.

The frugality was seen in various places. For instance, sales fell 0.8 per cent at food and beverage stores in July. On earnings calls, supermarket executives have noted that shoppers are trading down to value brands as grocery prices rise at the fastest pace in more than 40 years.

Sales at furniture stores fell 3.4 per cent amid weaker activity in the housing market. Sales at electronics and appliance stores fell 2.8 per cent, while those at clothing retailers fell 3.3 per cent.

As borrowing rates increase, households will be dedicating more of their budgets to debt-servicing costs. That should weigh on consumer demand in the near future.

“With the Bank of Canada’s policy rate hikes still feeding through and consumer confidence very low, retail sales growth is likely to remain weak over the rest of the year,” Stephen Brown, senior Canada economist at Capital Economics, wrote in a client note.