This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Notes from Alex Carrick - Jun 15, 2011

Alex Carrick
U.S. inflation moved up to 3.6% in May with commodity prices as the spur

Complicating life for Ben Bernanke, Chairman of the Federal Reserve, is the latest report on U.S. inflation by the Bureau of Labor Statistics. May’s year-over-year change in the all-items Consumer Price Index (CPI) was +3.6%.

That’s the fastest rate of increase in prices since October 2008’s +3.7%. Prices were rising rapidly earlier in 2008, until the international price of oil reached a peak in July of that year.

Once oil prices started falling with the onset of the world recession, the pace of general price increases eased back considerably.

In the latest month, the “core” inflation rate which omits volatile food and energy prices rose 1.5% year over year. That was a step up from April’s +1.3% but was still quite restrained. Some would argue, therefore, that there’s no need to worry about inflation yet.

If only things were so simple. Unfortunately for policy wonks, people have to eat and drive vehicles.

The price of food for consumption at home has risen 4.4% year over year and gasoline has shot up 36.9%. 

New motor vehicle prices have risen 3.4% in the past year and used cars and trucks, 4.1%.

Inflation is clearly becoming more of a concern around the world. There has already been one interest rate hike in Europe, to rein in overheating, with firm suggestions of more to come.

In China, inflation is threatening to surpass 6.0% even after bank reserve requirements have been raised in numerous stages and four rate increases have been imposed since last September. .

The problems in the price area relate mainly to commodities. Earlier oil and base metal price increases have been working their way into the general price level. And the United Nations’ Food and Agricultural Organization has reported food prices reached a record level world-wide in February of this year.

A series of extraordinary events has contributed to the increase in raw materials prices. The Arab Spring, and particularly the conflict in Libya, have cut off some oil supplies and jacked up prices.

Extraordinary weather systems in some regions – perhaps most notably Australia, Brazil and parts of North America – have damaged crop yields and raised agricultural prices. The latest nation to feel this effect will be China. One of the worst droughts in memory along the Yangtze River has been followed by severe flooding.

An inflation rate of 3.6% is well outside the Federal Reserve’s comfort zone. It would normally signal a need for action in terms of more restrictive monetary policy to slow price advances.

However, the state of the economy is still fragile enough that the federal funds rate will be left where it is – at nearly 0.00% in nominal terms – at least through the end of this year.

The latest month’s lofty inflation number is what a lot of analysts and even some representatives on the Fed’s board have been worrying about – that the excessive monetary stimulus provided by QE2 (the $600 billion addition to the money supply comprising the program termed “quantitative easing 2”) would flow into the overall inflation rate and perhaps become embedded.

Nevertheless, given the ongoing struggles of the economy, there will continue to be speculation about the possibility of a QE3 program. It also has to be recognized that it will be very difficult for the Fed to take restrictive action to rein in prices when home valuations are still falling.

The latest S&P Case Shiller existing home price indices, March versus February, recorded a 0.6% drop for the 10-city composite and a 0.8% decline for the 20-city composite. The cumulative decline in existing home prices since their peak in 2006 has been about one-third.

Besides U.S. home prices, there are some other notable areas world-wide where prices are expected to take a tumble. This will be to the disappointment of some heavily indebted nations.

As means to raise funds and deal with their sovereign debts, several euro-zone nations including Greece, Portugal, Ireland and Spain have plans to sell public assets. But such desperation selling is likely to lead to less than stellar returns. 

Since the economic problems of these nations are well known, property sales will be into a buyers’ market. Potential purchasers will pick up on the panic. Nor has the time been set aside and proper consideration given to polishing up the assets to get the best price.

Some of the properties likely to go on the market are as follows. Athens is said to be willing to offer up for sale a casino, a golf course and toll roads, plus public sector stakes in a gas supplier and a telecommunications firm. Madrid is looking to divest its state lottery and an airport operator. Dublin may be willing to relinquish the reins of a renowned horse-breeding estate and shares in an airline.

What is perhaps most intriguing is the snapshot this provides into what constitutes a modern economy. It also begs the question of how governments got sidetracked into some of these outside activities and ownership positions in the first place.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.


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Read Other Recent Alex Carrick Posts

05/14 - Economic Nuggets - May 15, 2012
05/11 - Canada Rode a Second Consecutive Month of Strong Job Gains in April
05/04 - U.S. Employment Rose by a Mediocre 115,000 in April
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04/18 - U.S. Inflation Low in March; Canada’s Central Bank Looking to Raise Rates
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04/03 - A Tale of Two Budgets
03/29 - A strong year for new construction investment intentions in 2012
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03/06 - Three key trends, more forays into high-tech and the importance for construction
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02/08 - Home starts and job levels diverge in Canada and the U.S.
02/03 - Canada’s labour market flat in January but U.S. on a roll
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12/22 - Canada stands firmly in the middle of the road as it enters 2012

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