All Quiet on the North American Inflation Front

February 22, 2013

Very subdued January CPI data were reported by the United States yesterday and Canada today. 

U.S. consumer prices were unchanged on month for the second time in a row following a 0.2% dip in November.  A 1.6% 12-month rate of increase was the lowest in a half year and down from 2.9% in the previous statement year to January 2012.  Excluding food and energy, consumer price inflation ran at 1.9% for a third straight month and 0.4 percentage points below the increase in the prior year to January 2012.  In the six years to January, total U.S. consumer prices advanced 2.2% per annum, down from annualized increases of 2.6% in the previous seven years to January 2007, 2.9% during the 1990s, 5.1% during the 1980s and 7.4% during the 1970s.  The latest on-year CPI advance is even below the pace of 2.5% in the 1960s or 2.2% in the 1950s.  Core CPI inflation of 1.8% over the past six years was down from 2.2% per year in the seven years to January 2007, 3.1% in the 1990s, 5.7% in the 1980s, 6.7% in the 1970s and 2.6% in the 1960s.

Inflation in Canada has been lower than in the United States.  January’s 0.1% month-on-month dip was the third decline in a row, and Canada’s on-year CPI increase of 0.5% constitutes a 39-month low and is down from 2.5% in the year to January 2012.  Core CPI inflation of 1.0% over the last twelve reported months is less than half as much as the 2.1% increase over the year to January 2012.  CPI inflation since 1992 has averaged 1.8% a year, 0.7 percentage points less than in the United States.

Inflation in these neighboring countries is below the shared central bank medium-term goal of 2.0% and likely to remain so for some time.  After the January 30 meeting, the FOMC wrote that it “anticipates that inflation over the medium term likely will run at or below its 2% objective” and also observed that “longer-term inflation expectations have remained stable.”  The Bank of Canada’s most recent interest rate policy statement on January 23 noted,

Total CPI inflation has been lower than anticipated, reflecting developments in core inflation and weaker-than-projected gasoline prices.  Total CPI inflation is expected to remain around 1% in the near term before rising gradually, along with core inflation, to the 2% target in the second half of 2014 as the economy returns to full capacity and inflation expectations remain well-anchored…. The more muted inflation outlook… suggests that the timing of any withdrawal [of monetary stimulus] is less imminent than previously anticipated.

The Bank of Canada’s overnight interest rate has been at 1.0% since September 2010, but officials have not, unlike the Fed, undertaken quantitative easing.  With a higher central bank rate than the Fed but less inflation, the Canadian dollar has averaged 1.003 per U.S. dollar over the past eighteen months, ranging narrowly between 0.966 and 1.062.  As a percentage of GDP, the two countries have similarly-sized current account deficits of about 3% or so.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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