February 2, 2010
Economy at a Glance | Feb. 2, 2010
Latest inflation rates in U.S. and Canada put pressure on central banks
ALEX CARRICK
Chief Economist, CanaData
December 2009 inflation rates have recently been released by government agencies for the U.S. and Canada. For both countries, the month-to-month change was minor: +0.1% in the U.S. and -0.3% in Canada.
However, it is the year-over-year figure that gets the headlines and draws the most attention.
In the U.S., that number has jumped up to +2.7% from -2.1% just five months earlier in July. In Canada, it is +1.3%, versus -0.8% to -0.9% in July through September of last year. Core inflation rates in both countries have been much more stable, at +1.8% in the U.S. and +1.5% in Canada. The core inflation rate eliminates volatile food and energy prices.
The international price of oil has had a very large impact on the overall inflation rates in both nations.
The key question is what impact these inflation rates will have on central bank interest rates. The most recent statement has been issued by the Bank of Canada.
The BOC’s intent is to keep its target overnight rate at 0.25% throughout the first half of this year. Having said this, the wording of the statement makes for interesting conjecture.
Three times within the one-and-a-half page report, the word “conditional” is used with respect to its commitment – once in the headline and twice in the body – to keep interest rates where they are.
The bank makes clear that its conditional commitment is tied to what happens with inflation. The BOC also says that it “retains considerable flexibility” with regard to its actions. Since the only direction that Canadian interest rates can be changed is up, this suggests that plenty of thought is being given to the matter.
But the Bank of Canada is in a bind. Portions of the BOC’s statement address this fact. The Canadian economy is getting by on domestic demand since net exports are making no contribution to gross domestic product. The reasons are continuing weakness in the absolute level of U.S. demand and the rise in value of the Canadian dollar versus the greenback.
Any increase in interest rates in Canada ahead of the U.S. will worsen the second problem. Interest rates in Canada are staying right where they are until the Federal Reserve takes action first.
The international price of oil has recovered about half of its peak-to-trough decline from July 2008 to early 2009. December 2008 was a very low base for world oil prices.
As a result, the year-over-year increase in gasoline prices in the U.S. in the latest month was astronomical at +53.5%; in Canada it was +25.6%. Despite the +2.7% year-over-year markup in the U.S. general price level, there is no expectation that the Fed will act soon to raise interest rates.
It is still not clear that labour markets have stabilized, with more job losses reported in December. And there continues to be too much excess capacity on shop floors and in the halls of office buildings.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His personal blog is at www.alexcarrick.com
(CPI & CPI-U not seasonally adjusted)
Data sources: Statistics Canada and U.S. Bureau of Labor Statistics (Department of Labor)
Chart: Reed Construction Data – CanaData.
