A More Realistic Definition of Inflation Based on Bills that Arrive in the Mail

07/23/2013 by Alex Carrick

The official inflation rate in Canada in June was a low +1.2% year over year for the all-items Consumer Price Index (CPI) and +1.3% for the “core” rate, according to Statistics Canada.

The core rate omits eight often-volatile sub-components of the CPI, including fruit, vegetables and fossil fuels.

The comparable U.S. figures are strolling, not running, a little faster, +1.8% for “all items” and +1.6% ignoring food and energy, according to the Bureau of Labor Statistics.

Low inflation keeps central bankers “dovish” ‒ that is to say, disinclined to raise interest rates. (When they want to raise yields, they’re said to be “hawkish”.)  

The highlighted inflation rate may be low, but I would suggest average homeowners have a sense that prices are increasing faster than statisticians are claiming.

The often-cited “man or woman on Main Street” becomes especially attuned to prices in several ways. Probably first among these is the cost to fill up the family “chariot” at the gas pump.

A high proportion of the population needs to buy petrol to travel to work. Furthermore, many of us like our routines. There’s a certain day of the week when we “top up”, preferably before Friday when the price rises in anticipation of the weekend.

We know how far we can usually drive on a tank of gas. The week-to-week change in how much we’re “dinged” is easy to monitor.

In June, Canada’s year-over-year gasoline price change nation-wide was +4.6%. In the U.S., it was +2.8%. Both were higher than the overall price jumps in each nation.

Just to let you know, if you do take public transit, the year-over-year price increase on city bus and subway routes was +2.4% for Canada as a whole.

The weekly supermarket shopping bill is another quick and reliable source of cost data. The direction of food prices is readily apparent to most shoppers. What wife or husband doesn’t come home from grocery shopping to vent about this or that outrageous price hike that has just been inflicted on the unwary?

Or to brag about how he or she spotted a bargain and filled their shopping cart with boxes of a particular brand of cookies that only one person in the house has the iron-clad stomach or frayed taste buds to eat? Maybe I’m just projecting from what happens in the Carrick household.

In Canada, food prices in June were +1.2% year over year, with a couple of popular sub-items heading into the stratosphere: bread, +4.3%; eggs, +4.5%; fresh or frozen pork, +4.8%; oranges, +9.2%; apples, +12.1%; and tomatoes, +13.3%.

The food sub-component index of the U.S. CPI in June was similar to Canada’s at +1.4%.

Then there’s a category I personally find most informative and distressing. It’s based on monthly bill payments. Included here are property taxes, utilities and internet services.

I still like to receive these in the mail rather than have the money deducted automatically from my bank account, partly because it helps me stay alert to price increases.  

In Statistics Canada’s latest CPI report, electricity was +2.2% year over year; water +6.6%; and natural gas, +11.3%.

Ontario used to derive a great deal of pride from being an electricity juggernaut. The province is home to the Sir Adam Beck hydroelectric facilities in Niagara Falls, as well as technologically-advanced heavy-water nuclear power plants scattered throughout the region.

The fumbling of new gas-fired power station construction (with two of them being relocated by Queen’s Park after initial ground-breakings), combined with the slow and costly switch to wind and solar generation, has caused the cost of electricity in the province to become a persistent headache for consumers and businesses alike.

Over the past 10 years, only Newfoundland and Labrador among the provinces has rung up a higher percentage increase in its power rate, +47.3% versus Ontario’s +46.6%.

The increase for Canada as a whole in the past decade has been +32.6%. 

Going back five years, Ontario’s +30.5% rise in electric power prices has exceeded all other provinces by a considerable margin, with B.C. in second place at +24.5%.

The Canada-wide gain since June 2008 has been +16.8%. 

In our increasingly high-tech world, full of computers and smart phones that require re-charging, there are some activities that absolutely require the use of electricity. Further moves to embrace a “green” agenda will intensify its usage. One only has to think of plug-in cars to conclude that continuing strong electricity demand is almost a sure thing.  

The cost of Internet access services has also moved up more than the overall inflation rate, +3.2% year over year in this latest June. Telephone services were +1.6%, but many people are finding non-traditional ways (e.g., social media, FaceTime and Skype, etc.) to stay in touch.

Property taxes were +2.8% in June and householders’ home and mortgage insurance was +3.3%.

All of the aforementioned bill-paying items recorded higher year-over-year price increases than Canada’s overall CPI gain of +1.2%.  

One alarming development is that along with the price increases, there seems to have been little improvement in the delivery of service. Two recent thunderstorms in the Toronto region knocked out power over extended periods of time for many residents.

As I’m key-punching this article, the power has just gone off. I’m operating on the back-up battery system. Okay, now it’s back on again. That was freaky.

Speaking of freaky, our utility problems are partly due to the bizarre weather patterns that have become common around the globe.

There’s also the uncomfortable thought that in many parts of the country, the standard of maintenance has fallen behind. What will happen to our utility bills when the public sector becomes more serious about recognizing shortfalls in the services it is providing?  

Detroit is the “poster city” for infrastructure breakdowns. Nearly half of all street lighting is no longer functional. For a variety of reasons ‒ e.g., a history of corruption at city hall and not just the auto sector’s slide in 2008-2009 ‒ the city has fallen into mind-numbing decline. Its population has dropped by more than half to only 700,000 as hordes of people have packed up and moved away in search of better prospects elsewhere.

Detroit has become the largest U.S. city to ever seek bankruptcy protection.

During much of the middle portion of the last century, commerce was good, tax revenue rolled in and governments undertook all manner of public works projects. Nobody had to worry about the quality of new delivery systems.

But now, those water and sewage treatment plants, water mains, and power transmission lines have matured. Regular wear and tear has taken its toll.

Earlier this summer, over a million citizens of Montreal were inconvenienced by a boil-water advisory. Repairs at a west-end treatment plant lowered the reservoir level such that sedimentation discolored the water emerging from taps and fountains around the city.

U.S. residents near Washington, D.C., were subjected to a similar scare. A shutdown of the water supply in Prince George County, Maryland, during the hottest week of the year was narrowly averted when officials found a way to work around a deteriorating water main.

The frequency of these unfortunate instances is sure to grow and jury-rigged fixes are not the long-term solution.

Clothes purchases also offer a strikingly visible means to monitor prices.

This category has featured bargains over the last several years. Two factors have been playing particular roles – imports from countries with low labor costs and intense competition among retailers.

In June, the apparel sub-component index of the CPI was +0.8% in both Canada and the U.S.

The Canadian dollar has now fallen below parity with the U.S. greenback and that will exert some upward pressure on import prices going forward.

The tragic consequences of poor working conditions in low-wage nations have been making headlines, with the building collapse in Bangladesh that killed over 300 garment industry workers as the most shocking example. A much-needed push is underway to improve construction standards in emerging nations and provide more benefits for disadvantaged labor forces.

Many other price movements are buried – e.g., health care costs, if they’re largely included in a company medical plan. And durable goods purchases, such as for a new or used car, are usually staggered over a considerable time gap, removing the immediacy of the price change.

Let me leave you with one piece of good news. Statistics Canada says the cost of home entertainment equipment is -5.9% year over year.

The U.S. CPI report includes the observation that the price of televisions is -14.4% and personal computers and peripheral equipment, -10.3%.

As if it needed confirming, cocooning (i.e., staying at home for entertainment) is a clear antidote to a host of pressures on the wallet.

Change in Price of Electricity to Consumers over the Past 10 Years

Leading economic indicators for Canada and the U.S.
All of the price changes are relative to 10 years ago. In other words, June 2003 has been chosen as the starting point.
Data source: Statistics Canada; Chart: Reed Construction Data ‒ CanaData.