Year-over-year CPI -0.7% in the U.S. and +0.4% in Canada

The two graphs that accompany this report tell it all. The peak for consumer prices in both the United States and Canada occurred last summer − July in the U.S. and August in Canada. There was a specific reason and it had to do with commodity prices that crested in July. The world price of oil rose to its peak level ever of $145 USD per barrel. Many commodity prices fell dramatically after that. Oil prices reached their bottom in February of this year at $34 USD per barrel. Therefore, year-over-year percentage changes can only be mild until both economies move past the summer of this year.

April’s overall inflation rate in Canada (+0.4%) dropped to a significant degree and is now only barely above the 0.0% level that marks deflation. The U.S. figure (-0.7%) has already crossed over. However, in both countries, the core inflation rate, which omits highly volatile items mainly in the food and energy categories, is around the historically acceptable level of +2.0% (+1.9% in the U.S. and +1.8% in Canada.).

Other Major Influences

Some of the other major influences on prices going forward will be as follows. The U.S. dollar has been depreciating of late and the Canadian dollar appreciating. This gives an upward boost to import prices in the U.S. and lowers import prices in Canada. It is one of the reasons that food prices in Canada (+7.1%), while still high on a year-over-year basis, are down from the March increase (+7.9%). The other major development is that oil prices are rising again. The world price of oil has climbed above $60 USD per barrel.

China’s economy is starting to revive. This will eventually provide a shot in the arm for raw material prices. The Chinese economic model is proving advantageous in a time such as this. Money directed towards infrastructure projects is having an effect. Also, the government owns the banks and has ordered an increase in lending that is helping to spur on the domestic economy. Longer-term, such deep government involvement has led to inefficiencies, waste and worse in other countries around the world. But for the moment, Chinese government actions are a boon to the world economy.

Construction Caught Up in the Cost Declines

The moderation in prices and costs is evident in the U.S. and Canadian economies. This has particular relevance for construction. For example, Statistics Canada recently reported that its apartment building construction cost index declined 4.7% in first-quarter 2009 versus fourth-quarter 2008. For non-residential buildings, Statcan’s composite index fell 4.2% quarter to quarter. Material cost declines and a weaker competitive market, particularly in the West, were the reasons. The year-over-year change was -2.3% for apartment buildings and +1.0% for non-residential buildings. Surveyed costs for both categories of construction include material, labour, equipment, taxes, overhead and profit.

Canada Inflation: All Items CPI vs CORE*
(not seasonally adjusted)

In Canada, the change in the energy sub-component index was -17.5% year over year in April 2009.
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)

In the U.S., the change in the energy sub-component index was -25.2% year over year in April 2009.
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.

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