The recession is dead. Long live the recovery. But where is it? With respect to many of the leading indicators on the economy, what is wanted is evidence of a turnaround. Sure, some sectors have recorded an improvement. First among these is the stock market. An improvement in equity values is usually way out front, say by six months or so, when it comes to a revival. With respect to most of the other main indicators – jobs, production, inventories, housing starts, etc. – it is mainly a case of declines bottoming out.

The Downward Bias from Energy Prices will soon Dissipate…

That brings the subject around to inflation rates in the U.S. and Canada. The all-items Consumer Price Index (CPI) is still headed down in both countries. Year-over-year inflation in the U.S. is -2.1% and, in Canada, it is -0.9%. There is a very good reason for this moderation in prices and it has to do with the energy sub-index. Due to the fact that global oil prices peaked in July of last year at $145 USD per barrel, the energy price sub-index in the CPI is -28.1% in the U.S. in July, year over year, and -23.4% in Canada.

Affecting the Timing of Interest Rate Moves

Oil prices moderated throughout the fall of last year and into early this year, reaching a low of $35 USD per barrel in February 2009. The downward bias on the inflation rate due to last July’s record-high oil price will begin to dissipate in August and wane further moving beyond September. Then it will be interesting to see how the general price level begins to perform, given the tentative steps towards recovery that are underway. The Federal Reserve and Bank of Canada will be watching closely to determine when they will need to take action to adjust their present extremely stimulative interest rate policies.