December 6, 2011
Turning the corner on inflation in both Canada and the U.S.
Chief Economist, CanaData
It appears a fortunate corner has been turned on consumer prices. In the latest month, they have exhibited some easing.
Until most recently, inflation in both Canada and the U.S. was trending upward, to the point where it was becoming worrisome.
In fact, the year-over-year change in the U.S. all-items Consumer Price Index (CPI) nearly touched +4.0% in September.
Canada hasn’t been that far behind, recording a year-over-year CPI gain of +3.7% in May.
In October, however, Canada’s inflation rate eased to +2.9% from +3.2% the month before. In the U.S., the figure dropped from +3.9% to +3.5%.
The cause of the deceleration in both countries can be found in the energy sector.
Earlier this year, the price of gasoline was approximately one-third higher than at the same time 12 months earlier, both north and south of the border.
That rate of increase has now fallen back to +18.2% for Canadians and +23.5% for Americans.
Central bankers pay more attention to the “core” rate of inflation than the higher-level number.
The “core” index omits some of the most volatile components of the overall CPI, principally in the energy and food areas.
It’s a relatively rare occurrence for either the all-items or core inflation rates in Canada and the U.S. to be the same.
October defied the odds. The core rate in both countries was +2.1%. Under normal circumstances, that’s an almost ideal level.
It promotes asset value gains over time, making home owners and businesses feel better about their holdings, while also rendering paybacks of nominal loan amounts less onerous.
In other words, confidence is generally bolstered with mild inflation.
These aren’t normal times, though. There is still a great deal of worry about the strength of the world economy.
What the present low core rates of inflation do provide is assurance that there will be no early turnaround in the interest rate policies of the Bank of Canada (BoC) and the Federal Reserve.
The near-record-low overnight rate of the BoC and the all-time record-low federal funds rate of the Fed will stay where they are – or perhaps drop even lower in the case of the BoC - for some time to come.
This interest rate scenario may well prevail all the way through 2012.
There’s more to be said about the performance of prices in the overall economy.
The change in value of the Canadian dollar has made an impact in several key areas.
In its “Machinery and Equipment Price Index” press release, Statistics Canada notes that the loonie depreciated 1.3% versus the greenback between the second and third quarters of this year.
The decline was due to international investors seeking the relative safety of U.S. money given the turmoil in European financial markets.
On a year-over-year basis in Q3, however, the loonie was actually up 6.0% versus the greenback. Â
Over much of the past year, this has made the acquisition of productivity-enhancing machinery and equipment, much of which is imported, a more attractive proposition.
It has also had an impact on the prices of computers and peripherals.
The Chinese Yuan is largely fixed to the U.S. dollar. Therefore, when the loonie appreciates versus the greenback, there is an almost equal gain versus one of Asia’s key currencies.
Canadians have been presented with some outstanding bargains when shopping for computer equipment.
According to Statistics Canada, year-over-year prices for commercial computers in October were -16.5%. For consumer computers, the price change was -10.9%.
The price of monitors has fallen 3.1%. But that’s next to nothing compared with the 16.4% decline in the price of printers.
News about these significant downward price adjustments is (almost) enough to make one want to rush out the door and go shopping, before someone else “steals” all the bargains.
That may not be such a bad thing as the run-up to Christmas shopping begins. This is the time of year which can make or break a retailer.
It may be particularly beneficial that some of the best buys are appearing in one of the habitually hot areas of consumer demand during gift-giving season, electronics.
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
(not seasonally adjusted)
Chart: Reed Construction Data - CanaData.
(not seasonally adjusted)
The U.S. figure (CPI-U) is the All Items Consumer Price Index for All Urban Consumers.
Chart: Reed Construction Data - CanaData.
