U.S. and Canadian Consumer Price Inflation

January 20, 2010

Seasonally adjusted consumer prices dipped 0.1% in December but firmed 0.4% in the United States.  The December-over-December CPI increases were respectively 1.8% in the U.S. and 1.3% in Canada.  Canada enjoyed an even greater advantage in comparisons of whole 2009 inflation, where the readings were merely 0.1% in Canada but 2.7% on average in the United States.

Energy prices accounted for the different performances in the two North American economies.  December energy costs rose 4.1% on month and 7.4% on year in the United States but dipped 1.6% on month and rose 5.9% on year in Canada.  For the past two full years, U.S. energy prices fell 21.8% in 2008 but rose 18.2% in 2009.  Canada experienced a reversed pattern, an increase in energy prices of 9.9% in 2008 followed by a drop of 13.5% in 2009.

Comparisons of core inflation in the two countries show similar patterns, in contrast.  December’s on-month core CPI results were no change in the United States and a 0.1% uptick in Canada, and they experienced similar December-over-December increases of 1.7% in the U.S. and 1.5% in Canada.  The United States average core inflation rate for all of 2009 of 1.8% was the same as in 2008, and Canada experienced full-year core inflation of 1.7% in both 2008 and 2009.

These finding support the view that central banks should pay as much attention to core inflation as to total inflation.  Yes, we all consumer energy and eat food, but the exclusion of these commodities isn’t based on their insignificance but rather than on their volatility and the unresponsiveness of such prices to changes in central bank interest rates.  It’s also flawed, however, for a central bank to consider only core inflation, because spikes in food or energy can destabilize inflation expectations and feed into other prices. 

Central banks also err when they ignore asset price inflation, looking instead only at the prices of final goods and services.  This became a timely debate during the Great Recession.  But twenty years earlier, the Bank of Japan ran a policy of extremely low interest rates in spite of rapid real economic growth and soaring property and stock prices.  Japanese officials then felt their loose credit policy was safe and appropriate because of subdued PPI and CPI inflation.  Conventionally measured inflation only seemed minuscule because of a soaring yen, which advanced from around 240 per dollar at the time of the September 1985 plaza accord to 120/$ by end-1987.  Economic theory suggests that policymakers set no more economic goals than the number of policy tools at their disposal, but practice indicates that attempts to run policy by simplistic mechanistic rules pose their own set of perils.  It pays to be eclectic.

The Canadian dollar was 17.4% stronger against its U.S. counterpart in December 2009 than in December 2008, but the loonie’s full-2009 average value of 1.1407 per U.S. dollar was 6.5% weaker than its mean value in 2008.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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