Update: Canadian inflation dips, as economy at home and around the world weakens - Macleans.ca

Update: Canadian inflation dips, as economy at home and around the world weakens

Julian Beltrame, The Canadian Press


OTTAWA – Canada’s inflation rate continued to slide in August, dipping one-tenth of a point to 1.2 per cent in one of several signs Friday that the Canadian and global economies are slowing.

Statistics Canada also reported that wholesale prices in Canada fell 0.6 per cent in July, and the World Trade Organization released a new forecast slashing trade growth to a weak 2.5 per cent this year.

The inflation softness was anticipated by economists — they had expected price growth to remain unchanged at 1.3 per cent — but the falloff in wholesale sales was three times higher than consensus.

Several analysts called on the Bank of Canada to switch its tightening bias from higher interests rates. Even so, they said the likelihood of bank governor Mark Carney actually making good on his language by hiking borrowing costs in the near future was near zero.

“While slow growth and global economic risks nearly slayed the notion that the Bank of Canada would be hiking rates any time soon, today’s inflation report put a nail in the coffin,” said CIBC.

The latest numbers, along with previously released data on manufacturing and housing starts, point to another disappointing quarter of growth in the July-September period, said CIBC chief economist Avery Shenfeld.

“We had hoped that because the second quarter had some distortions that held back growth, that we would see a bounce above two per cent in the third,” he said.

“It looks like it will be once again below two per cent. Not a disastrous quarter, but a continuing of the very mediocre trend for Canada.”

Earlier in the week, TD Bank projected the third quarter could see growth drop to as low as one per cent, from 1.8 in the first two quarters of the year, and half the Bank of Canada’s forecast.

Capital Economics analyst David Madani said his reading is that inflation pressures in Canada will weaken in upcoming months, although food prices should start rising in response to crop failures from the summer drought in the U.S.

Given that outlook, the Bank of Canada should drop all pretence that it’s looking to withdraw stimulus, he said.

“The economic slowdown underway in Canada, due to softening external demand and a slumping housing market, points to an increasing output gap and more disinflationary pressures,” Madani said.

Low inflation is typical of a weak economy where retailers and producers face soft demand.

Core inflation, which measures underlying price pressure and excludes volatile items such as gasoline, fell one-tenth of a point to 1.6 per cent and was comfortably below the Bank of Canada’s two per cent target.

Bank of Montreal economist Robert Kavcic noted the core inflation rate was the coolest pace in just over a year and down from a recent high of 2.3 per cent set in February.

On a month-to-month basis, prices rose slightly by 0.2 percentage points from July as gasoline prices rebounded by 2.7 per cent during the month. On a seasonally adjusted basis, prices rose more briskly at 0.4 per cent month-to-month.

That wasn’t enough to push the annual rate higher, however, given that prices also rebounded last year at this time and increases on most goods and services were modest.

The more significant movers pushing the annual rate higher were gasoline, passenger vehicles, which on average cost two per cent more than a year ago, meat, up 5.7 per cent, and homeowner replacement costs, which increased by 2.2 per cent.

Food overall was 2.2 per cent higher, a slight increase from July, but showing no signs as yet of the major bounce expected later this year in response to the drought in the southern U.S. states.

But natural gas fell 13.9 per cent, video equipment by 15.6 per cent, women’s clothing by 3.4 per cent, furniture was down 3.0 per cent, and mortgage interest costs were 1.8 per cent lower.

With a jump of 4.6 per cent in August, gasoline prices were strong enough to push up the annual inflation rate in Quebec by one-tenth to 2.0 per cent, the highest in Canada. The gasoline price jump in Quebec was more than twice the national average, the agency said.

On a regional basis, inflation was highest in Quebec and lowest in New Brunswick, Ontario, Alberta and British Columbia, which all recorded an annual rate of one per cent.

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Update: Canadian inflation dips, as economy at home and around the world weakens

  1. If inflation is 1.2%, why is everything between 5% and 30% higher priced?

    • Cuz the index is woefully inadequate; the substitution effect drives the index down even as prices rise. People can no longer afford Good A, so they buy the cheaper Good B instead. StatsCan then substitutes more of Good B for Good A in the index, to “reflect changing consumption patterns”, thus lowering the apparent price increases. Meanwhile, consumption patterns changed because of price increases in the first place! The CPI – like nearly all inflation indices the world over – has an inherently deflationary bias. I do not believe this represents a conspiracy to under-report inflation. It’s just the usual hubris of statisticians and economists, and their reluctance to recognize that their statistical indices and models are no longer functioning properly.

      Wanna know why the housing bubble never really showed up in the reported inflation rate? Take a look at the composition of the CPI on the StatsCan website. Real estate prices are absent. That’s right, the most expensive thing you’ll ever buy isn’t included in the CPI at all. They include rent, and housing related services, and even mortgage interest rates, but ignore actual housing prices. Thus, we can have a housing bubble that lasts a decade, yet the CPI shows subdued inflation.

      Nassim Taleb wrote an entire book – the Black Swan – about the inability of statisticians and economists to discern between their models and the real world. I highly recommend it.

  2. The reason corporations are hoarding money (aside from the overvalued dollar) is because Carney’s got an itchy trigger finger. He will jack up interest rates before the recovery fully takes hold, which will kill the recovery and the return on their investments. A better plan would be to raise the inflation target to 4% over the next 5 years. Then investors would be less willing to hold onto their money and invest it. This would create a booming recovery and a bull market. Then he would have plenty of room to raise interest rates back to normal levels.

    With his itchy finger on the anti-inflation trigger, rates will be stuck at 1% for a long time to come. Same thing happened in Japan, and 17 years later interest rates are still below 1%… This policy is clearly self-defeating…

    • Inflation is not the opposite of unemployment. If inflation goes up, you may well have both unemployment and inflation. Then you’ve got two major problems instead of one. They called it ‘stagflation’ back in the 70s. You Phillips curve adherents have an astounding ability to ignore recent history. Also, your belief that the BoC – or any central bank – can just magically bring about a recovery demonstrates once again how badly out of your element you are. As though bringing about a recovery is as simple as pushing this button, pulling that lever, and turning that dial over there. Simple – it’s just Economics 101! You really need to find something other than economics to comment on. You look more foolish with each post. Amazingly, it doesn’t seem to bother you at all.

      • Actually the theory I was commenting on was originally put forward by Paul Krugman who won a Nobel Prize in economics. Central bankers around the world have been using monetary theory to “magically” bring about recoveries by “pressing levers” for decades. These economists are clearly not the ones out of their element here.

        In the 1970s, there were years of high inflation before stagflation occurred. The Phillips curve explains the original mechanism: full-employment monetary policy. The theory makes sense. If unemployment drops too low, demand for labor increases and wages become inflationary.

        The problem is that if an overheating, inflationary economy persists for a long period of time then other negative side effects kick in, like negative real interest rates and a bear stock market. These cause recession and high unemployment.

        The demand-side Keynesian system explains everything with perfect consistency. An inflationary economy is caused by too much aggregate demand for goods and services. High demand puts and upward pressure on prices creating inflation. A depressed economy has too little demand. This causes people to cut back on spending and investing which kills jobs and GDP growth in a vicious circle (“paradox of thrift”.)

        The Keynesian solution is to use fiscal and monetary policy as a counterweight to the boom-to-bust business cycle. This is best summed up by: “the boom, not the bust, is the time for austerity.”

        But back to your original point: a) 4% inflation is not high inflation; b) an economy has to recovery first before high inflation can set in; and c) when inflationary pressures build the central bank can reel them in with higher interest rates; d) all this gets the desired result: an economic recovery with interest rates back up to normal levels.