February 26, 2010
Economy at a Glance
Inflation and retail sales implications for interest rates
ALEX CARRICK
Chief Economist, CanaData
The U.S. Bureau of Labor Statistics has released January 2010 Consumer Price Index estimates. They show a 2.6% increase for all prices in the latest month versus January 2009.
The biggest cause of the year-over-year gain was gasoline, at more than +50%. Some other large increases came in hospital and related services +6.8%, new motor vehicles +4.1% and used cars and trucks +11.5%. Excluding food and energy, the year-over-year gain in prices was +1.6%. The comparable year-over-year CPI changes in Canada were +1.9% for all items and +2.0% for core.
The +2.6% figure for the U.S. “headline” inflation rate was little changed from the +2.7% level in December. Inflation has livened up considerably from mid-2009, when the prevailing concern was deflation. The CPI is bouncing around because of the great volatility in commodity prices over the past several years. For example, the world price of oil maxed out in July 2008 at over $140 USD per barrel. Then it sank back down to $35 USD per barrel in early 2009.
Year-over-year index comparisons are going to run into base-level problems. For example, comparing energy prices now with what they were a year ago in a deep slump yields a big rise. The Federal Reserve is counting on this effect dissipating by the halfway point of this year. This carries some risks with respect to interest rate policy. Continuing moderate price advances are a prerequisite for the federal funds rate staying where it is, at 0.0% to 0.25%, a record low.
It appears that the Fed is already having some doubts about the veracity of this scenario. There is at least one voice pushing for higher rates among the regional bank governors who meet to discuss interest rate policy. Also, the fed has just raised its discount rate, and while this does not have the same sweeping implications of a federal funds rate increase, it is significant regardless.
Enormous excess capacity in the U.S. should keep a brake on prices at least into the fall. Extra office space and plant capacity will keep prices down on the supply side. At the same time, the large number of unemployed will call for price bargains on the demand side. This is gradually changing. The January 2010 U.S. retail trade numbers showed a significant pick-up (+4.7% year over year). They are back to the kind of per cent change that one sees in a normal economic advance. But they do remain more than 7.0% below their previous peak in November 2007.
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 lifestyle blog is at www.alexcarrick.com
Data sources: Statistics Canada and U.S. Bureau of Labor Statistics (Department of Labor).
Chart: Reed Construction Data – CanaData.
