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January inflation remained under control in both the U.S. and Canada

02/21/2012 by Alex Carrick, RCD Canadian Chief Economist

In January, the rate of inflation in Canada increased a little from +2.3% the month before to +2.5%, according to Statistics Canada. That was the year-over-year change in the Consumer Price Index (CPI).

In the U.S., the inflation rate fell back ever so slightly to +2.9% from +3.0%, as calculated by the Bureau of Labor Statistics.

In both instances, the inflation rate was below the most recent high. For Canada, that occurred in May of last year at +3.7%. In the U.S., inflation most recently peaked at +3.9% in September of 2011.

A 2.0% rate of inflation is what most central bankers aspire to achieve. Such a rate makes nominal loan amounts easier to repay over time for both consumers and business enterprises, promotes a gradual increase in the valuations of important assets and, crucial to social peace, isn’t too onerous on fixed income earners. 

The “core” rate of inflation in January in both countries was almost the same, +2.1% for Canada and +2.5% in America. The “core” rate omits items which are highly volatile and largely outside the control of domestic fiscal and monetary policies.

For the most part, such items are in the food and energy categories. This brings us to an important point.   

The U.S. economy is now creating jobs at a rapid clip, approximately one million in the past six months. One corollary is that the number of layoffs has dropped dramatically, as recorded in the initial jobless claims statistics.

For the latest week, the number of first-time out-of-work insurance seekers in the U.S. fell below 350,000. If that level is maintained, there will be an ongoing significant improvement in the unemployment rate, which has eased back from 10.1% at its worst (October 2009) to now stand at 8.5%.

Entering 2012, the worry was mainly about the European debt crisis, an expected slowdown in China and the fragility of the U.S. recovery.

If Greece receives its second major bailout package, that will put the problems of Europe on the backburner for a while at least. China and its export sales will be helped out as well. And the U.S. economy will be unencumbered by uncertainty as it concentrates on healing.

However, there is one threat to the U.S. economy that holds a prominent position in the CPI data base. It’s a specific commodity and of course I’m talking about the world price of oil, which in turn determines the cost of gasoline.

When gasoline prices are climbing by double-digit percentage changes, and especially when they’re higher than +20% year over year, this influences how businesses and consumers approach their everyday spending intentions. The tendency is to be more cautious.

Discretionary purchases in many other areas – e.g., restaurant meals, a night at the cinema, fancy clothes, an upscale grocery item, etc. – have to be put off simply to buy gas to get to work.

At the moment, the cost of gasoline is not seriously inhibiting economic growth. But it has to be monitored closely. The potential sources of conflict in the Middle East, currently centred most clearly in Syria and Iran, have the potential to destabilize world oil prices.

In January, the energy sub-index in Canada’s CPI was +6.5% year over year and in the U.S., it was +6.1%. Delving further into the detail, the price of gasoline in Canada was +6.8% while it was +9.7% in America.

Those are significant come-downs from percentage changes that were nearly +30% in Canada and +36% in the U.S. at the mid-point of last year.

Thanks largely to positive spillover effects from the growing U.S. economy, Canada appears to be revving up as well.

The leading indicators index published by Statistics Canada for January was +0.7% month over month. That was the same high rate of increase as occurred in December.

The nation’s leading indicator series has risen in seven consecutive periods. Historically, a good month-to-month change has been +0.4%. In the 31 months of data since the end of the recession in July 2009, there have been 25 increases of +0.4% or higher.

The out-front sectors in January were manufacturing, housing and services employment.

In manufacturing, the shipments-to-inventories ratio increased to 1.96 from 1.93 and the average workweek in hours rose 0.3%. In housing, home starts continued to perform at an exceptional level, near the 200,000-unit mark, seasonally adjusted and annualized.

Business and personal services employment rose 0.4% month to month.

Economists, in their assessments of what is transpiring, are trained to be impartial. We’re supposed to keep a clear head as we examine just the facts. Given the travails of the past several years, however, I’m tempted to cheer on the latest good work.

I don’t know whether it will do much good, but I don’t see how it can hurt. 

Canada inflation – all items CPI vs CORE*
(not seasonally adjusted)
Canada  inflation – all items CPI vs CORE
In Canada, the change in the energy sub-component index was +6.0% year over year in January 2012.

The Canada figure (CPI) is the All Items Consumer Price Index. *Core inflation has been defined by the Bank of Canada. It is the Consumer Price Index (CPI) excluding the eight most volatile components: fruit, vegetables, gasoline, fuel oil, natural gas, intercity transportation, tobacco and mortgage interest costs. It also excludes the effect of changes in indirect taxes on remaining items. The core inflation rate in Canada is monitored with respect to setting interest rate policy. The target range is 1% to 3%.
Data source: Statistics Canada.
Chart: Reed Construction Data - CanaData.
U.S. inflation: all items (CPI-U) vs all items less food and energy
(not seasonally adjusted)

U.S. inflation: all items (CPI-U) vs all items less food and energy

In the U.S., the change in the energy sub-component index was +6.5% year over year in January 2012.

The U.S. figure (CPI-U) is the All Items Consumer Price Index for All Urban Consumers.
Data source: U.S. Bureau of Labor Statistics (Department of Labor).
Chart: Reed Construction Data - CanaData.
Canada's composite leading indicator index (1992= 100)

Canada's composite leading indicator index (1992 = 100)

Data source: Statistics Canada.
Chart: Reed Construction Data - CanaData.


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