Headline Inflation +2.2% in Canada and +4.2% in the U.S.
The year-over-year rate of “all-items” inflation in both Canada and the United States quickened in May 2008. In Canada, the “headline” (i.e., all-items) rate moved up to +2.2% on a year-over-year basis. In April, it had been +1.7%. In the U.S., the overall inflation rate jumped to +4.2% in the latest month, up from +3.9% the month before. The U.S. rate has been +4.0% or above in six of the last seven months. In both countries the core rate of inflation stayed the same in May − +1.5% in Canada and +2.3% in the U.S.

Core inflation excludes mainly food and energy on two grounds – those two items are the most volatile in terms of price movements and they are the least controllable, especially by interest rates. Food is too often dependent on the weather and energy prices can depend on the political situation in other countries, besides being susceptible to the vagaries of international demand and nominal (or theoretical) supply.  

Gasoline is Igniting the Increase
The major contributor to accelerating inflation in Canada in the latest month was rising gasoline prices. The cost of gasoline in May 2008 was +15.0% higher than in May 2007 (+20.8% in the U.S). Excluding gasoline, Canada’s all-items CPI was up only +1.6%.

Provincially, the year-over-year gasoline price increases ranged from highs over +17% in Québec and Ontario to a low of “only” +8.0% in British Columbia. B.C. was the only province with a gasoline price hike below double digits. Behind the gas price run-up has been a near doubling in the international price of oil versus this time last year.

All forms of fossil fuel energy are driving up prices in both countries. For example, pity poor homeowners that have been heating their homes with fuel oil, where the year-over-year price increase has ranged between +40% and +50% in both countries.

Some Goods Offer Price Relief
However, there are also some consumer items that are helping to restrain the overall price increase. Chief among these are motor vehicles, computer equipment and ladies clothing. In Canada, the year-over-year change in the sub-index to purchase and lease vehicles was -8.0%. This was a combination or rebates and the higher Canadian dollar. In the U.S., personal computers and peripheral equipment prices are -13.0% on a year-over-year basis. Finally, women’s apparel prices have been -7% in Canada and -5% in the U.S.

It is interesting to note that roles are reversed when it comes to a comparison of labour rate increases between the two countries. Average hourly earnings in Canada are +4.8% on a year-over-year basis, whereas they are a smaller +3.5% in the United States. Labour is putting less pressure on the general price level south of the border than north.

Policy Implications
The core inflation rate numbers are okay in both countries. However, the fact that the all-items rates are rising is not conducive to either fiscal or monetary stimulus. Never mind that interest rates are really about as low as they can go anyway. Furthermore, the problems on the monetary side are due to credit restrictions rather than repayment costs.

The U.S. economy is being held back by high and rising energy costs and by too tight credit. Canada’s economy is being restrained by high and rising energy costs and by the difficulty that manufacturing is having adjusting to the higher-valued Canadian dollar.

With respect to these problems, it is now largely a matter of waiting them out. Energy costs will moderate from their record high (perhaps speculation-driven) current levels, even if they are on a long-term upward path. Financial markets will gradually return to more normal − but let’s hope, not foolhardy − lending practices, with more traditional interest rate spreads. And Canada will come to appreciate the rise in value of the loonie even as manufacturers make the necessary productivity adjustments to restore their competitiveness in foreign markets.   

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