According to government agencies, Consumer Price Index changes in Canada and the U.S. continued on their downward paths in June. In Canada, the figure was -0.3% year over year and in the United States, it was -1.4%. However, core inflation rates − which omit volatile food and energy components − were on more normal trajectories, with Canada at +1.9% and the U.S. at +1.7%. Not since 2003 has the core inflation rate in either country diverged by plus or minus more than one percentage point from +2.0%. Overall rates are lower than core rates because of year-over-year energy price declines.

Oil Prices are Playing Havoc with CPI Data

Oil prices were at their peak in July of last year. Therefore, the base figure is high in the year over year comparison. This will not change until the economy moves into the fall.
Gasoline prices are -34.6% year over year in the U.S. and -24.3% in Canada. It needs noting, however, that the price of oil has moved up substantially from its trough figure in February. As a result, gasoline prices in June versus May were +16.4% in the U.S. and +6.8% in Canada. This has more ominous implications for future price movements. (story continued below)  

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

In Canada, the change in the energy sub-component index was -19.0% year over year in June 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.

In Canada, it’s often about Food Prices

For Canada, the big CPI news concerns food. This category is up 5.5% year over year. Food purchased from stores is up an even higher 6.4%. This is really “eating” into a lot of families’ budgets. The following lists some of the most significant and/or surprising price movements, June of this year versus June of last year. This is shopping-cart sticker shock.

Fresh or frozen beef is now 9.7% more expensive than a year ago. Fish has moved up in price by 8.5%. Breakfast cereals are 6.3% pricier. Fresh fruit is +11.0% and vegetables are +9.1%. Oranges are +8.3%, but that pales by comparison with potatoes, at +27.4%. Sugar and confectionery is +5.6%; fats and oils are +6.9%; coffee and tea is +6.6%; and condiments, spices and vinegars are +7.8%. Non-alcoholic beverages are +11.4%. Don’t forget Rover or Fluffy. The cost of pet food has risen by 11.2% compared with last June. (story continued below)

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 -25.5% year over year in June 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.

In the U.S., it’s Health Care and Education

In the U.S., food prices (+2.1%) have also been rising in price, but not to the same degree as in Canada. South of the border, sprouting prices have been appearing in more established breeding grounds, medical care (+3.2%) and education (+3.0%). At a time when publicly-funded health care in the U.S. is being hotly debated in Congress, the hospital and related services sub-sector of the CPI is showing a 6.2% year-over-year increase. However paid for, health care costs are increasing at alarming rates.

Longer-term Inflation Prospects Depend on Commodities

The interesting question is the longer-term prospects for prices. Much of this depends on commodities. Specifically, the price of oil dropped from July 2008 to February 2009. But it has been moving up in fits and starts since then. On a month-to-month basis, the all-items CPI change in Canada was +0.3% in June. In the U.S., it was +0.9%. The latter number is indicative of an economy that is starting to experience some increases in prices, mainly as a result of recent movements in the world price of oil. Due to massive government stimulus, many analysts are on the lookout for signs of early-stage inflation.

While there is little reason to expect the Bank of Canada or the Federal Reserve to tighten their interest rate stances at this time, based on the latest CPI numbers, it is worth taking note that the U.S. commodities sub-category in the Consumer Price Index rose 2.3% month-to-month in June. Undoubtedly, this is a significant gain on an annualized basis.

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.