The latest inflation results have recently been released for both the United States and Canada. Canada's year-over-year change in the Consumer Price Index (i.e., the all-items CPI) for May 2009 was +0.1%. The change in the U.S. was -1.3%. In other words, there was no inflation in the general price level in both countries. Core inflation, however, was another matter. It was +2.0% in Canada and +1.8% in the U.S. The core rate ignores the most volatile components of the CPI, which are mainly in the food and energy areas.

At the same time, everyone does have to contend with food and energy prices. The year-over-year change in the energy sub-component index in the U.S. was -27.3%. In Canada, it was -18.3%. There is a built-in mathematical factor that means inflation can be nothing but weak until past July of this year. That is because July of 2008 was the peak period for worldwide commodity prices. At that time, the global price of oil touched an all-time high of $145 USD per barrel.

Therefore, year-over-year comparisons until the end of summer are going to be against a high base level. The subsequent long steep slide in the price of oil bottomed out in February at $35 USD per barrel. Most recently, oil has moved back up in price to $70 USD per barrel. As the economy moves into the fall and early winter of this year, the higher level for world oil prices will start to have an effect on consumer prices.

Natural Gas Prices

Natural gas prices are also having a considerable negative impact on the overall price level. Gas is exceptionally low-priced at this time, due to a couple of factors. Its use in industry and in power generation is way down due to the recession and plant closures and shutdowns. That is the demand side. On the supply side, there has been considerable success in finding and gaining access to additional reserves. New horizontal drilling techniques are tapping into gas reservoirs trapped in shale deposits deep underground.

The imminent opening of the new Canaport LNG (liquified natural gas) facility in Saint John, New Brunswick, a joint venture of Irving Oil and Repsol of Spain, will also add to the abundance of supply for the Atlantic coast and New England. On an energy equivalency basis, natural gas in millions of British thermal units or 000s of cubic feet should be one-sixth the price of a barrel of oil. At this time, it is only about one-twentieth.

The Interest Rate and Construction Prospects Connection

The low all-items inflation rates coincide with two economies in recession. However, there are several pluses to be gleaned from the latest CPI results. Short-term interest rates remain about as low as they can go. This is allowing distressed banks in the U.S. to raise their earnings and increase capital through share offerings. Ten banks that received money through the troubled asset relief program (TARP) are starting to pay the public sector back, which is positive for taxpayers and good for private sector governance of financial institutions, regardless of what the new regulatory environment might be.

Inflation and short-term interest rates will remain subdued stretching out into the fall. But how long-lasting will this be? There are indications that some commodity prices are already starting to emerge from their hibernation. Also, long-term interest rates have almost moved up to pre-recession levels. Central bankers are emphasizing the fragility of the "green shoots" of recovery that are emerging. Keep in mind that central bankers always have a purpose in mind in their pronouncements. A major part of their arsenal is moral suasion. The emphasis on fragility is their way of talking down wide-spectrum interest rates. This is important for construction projects contemplated by the private sector and about to be launched as part of infrastructure initiatives by the public sector.

Canada Inflation: All Items CPI vs CORE*
(Not Seasonally Adjusted)

In Canada, the change in the energy sub-component index was -18.3% year over year in May 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 -27.3% year over year in May 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.

Canada vs U.S. Inflation — Monthly
(CPI & CPI-U Not Seasonally Adjusted)

Data sources: Statistics Canada and U.S. Bureau of Labor Statistics (Department of Labor).
Chart: Reed Construction Data - CanaData.

Canada vs U.S. Core Inflation — Monthly
(CPI CORE & CPI-U Less Food and Energy Not Seasonally Adjusted)

Core inflation in the United States is CPI-U less food and energy.
Core inflation in Canada is as 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.

Data sources: Statistics Canada and U.S. Bureau of Labor Statistics (Department of Labor).
Chart: Reed Construction Data - CanaData.