March Consumer Price Index (CPI) +4.0% in U.S. and +1.4% in Canada
The latest inflation figures for both the U.S. and Canada have been released over the past two days. The all-items inflation rate in the U.S. for March 2008 was 4.0% year over year, which was almost three times as high as Canada’s level of 1.4%. The U.S. inflation rate, absent food and energy, was considerably more restrained than the overall rate (2.4% versus 4.0%). However, Canada’s core inflation rate was even lower at 1.3%.

U.S. all-items inflation has been stuck at 4.0% or slightly higher for the past five months. U.S. core inflation has exceeded 2.0% for the past seven months. Both the all-items and core inflation rates in Canada have been on downward paths for about half a year or more.

U.S. Purchasers under Wide-ranging Price Assault
U.S. purchasers are under price assault in a wide range of areas. Medical care costs are +4.6% year over year. Food and beverage costs are +4.4%, which may actually be relatively mild compared with many other countries around the world. Food riots over shortages and high prices have broken out in many locations, most frequently in less developed nations.

Dairy and related products are +11.0% in the U.S. on a year-over-year basis and cereals and bakery products are +8.1%. The price of wheat has gone up dramatically. No. 1 grade wheat costs twice what it did a year ago. This has been the largest price jump in 25 years.

Canada an Anomaly in Terms of Food Prices
Canada has been a lucky anomaly on the food price front. The food sub-component of Canada’s CPI is ahead by only 0.4% compared to last year. There have been two major reasons. First, frost in California last year caused 2007 import prices to be high. Second, the large increase in value of the Canadian dollar, this year versus last year, has meant significant drops in prices for imported fruit (-11%) and vegetables (-18%).

Energy Price Hikes are Dramatic
Rising energy costs are having a much bigger impact in the U.S. than in Canada. The energy sub-index in the U.S. was +17.0 year over year in March in the U.S., but only +5.4% in Canada. Gasoline prices were +26.0 south of the border, but only +7.9% north of the border.

However, there has been one side benefit of higher gasoline prices. Automakers have lowered suggested retail prices and offered greater incentives to bolster their sales. Nevertheless, due to generally weaker numbers on the U.S. economy (e.g., actual job losses), motor vehicle sales have been faltering in the U.S., whereas they have maintained a relatively steady pace in Canada.

Shelter Cost Increases are a Good Thing
Among major sub-components of its CPI, Canada has rapid price inflation really only in one area and that’s shelter (+4.1%). Furthermore, it may seem like a strange twist, but that relatively high level of increase is actually good news. It arises from the fact that house prices are continuing to increase across the country. This is positive in terms of the “wealth effect” and consumer confidence. Falling house prices have seriously cut into consumer confidence in the U.S.

Where both economies are seeing dramatic price relief is in imports of consumer goods from countries outside North America, mainly Asia. For example, prices for apparel in the U.S. are -1.4% year over year and the clothing and footwear sub-index in Canada is -1.5%. Prices for computer equipment and supplies are -12.0% in the U.S. and -15.0% in Canada.

What does this Mean for Both Economies?
Very little of the foregoing is particularly good news for the U.S. economy. High prices hold back consumer spending, which accounts for 70% of total U.S. Gross Domestic Product (GDP). A more conservative consumer means a need for more stimulus. But monetary authorities have already applied a great deal of prodding. The federal funds rate has been cut by 300 basis points since last fall. Even lower interest rates will weaken the U.S. dollar further and raise import prices more. Expect no more than a 25 basis point (100 basis points = 1.00%) cut in this period of slowdown.

Canada, with its low inflation rate, has the luxury to be freer with its interest rate policy moving forward. A 50 basis point cut in the target overnight rate would not be out of line on April 22, considering the gap that has opened up with U.S. interest rates and the handicap that export-dependent Canadian manufacturers are finding themselves operating under as a result of the high-valued “loonie”.

Member Comments