Canada CPI: looking behind the headlines

Canada's headline consumer price index rose 0.1 percent in the year to August, according to data released this morning by Statistics Canada.  This matched the increase previously reported for July.  The Bank of Canada has been expressing concern that many Canadians simply do not believe that inflation is so low, so it's worth looking behind the headline number to see how some of the sub-components are faring.

One figure that immediately jumps out of the detailed breakdown is the price of gasoline -- down 11.1 percent year-on-year.  This is the principal reason that the headline number is so low, and reflects the fact that the North American "summer driving season" has been much less active than usual, courtesy of the COVID pandemic. For the same reason air transportation prices remain low -- down 16 percent year on year as airlines offer deep discounts in an effort to entice customers, though of course, this is not a regular purchase for most people.

If we look at the important food component of the index, we find a different story.  Food prices were up 1.8 percent year-on-year in August, although they actually fell slightly from the previous month.  That monthly slowdown reflected a recovery in beef supply, which had been severely affected by COVID outbreaks in packing plants during the second quarter of the year. The equally important shelter component of the index rose 1.5 percent in the year to August. If we recognize that food and shelter are major (and largely non-discretionary) components of the average household's budget, it becomes easier to understand why the general public may distrust the headline inflation data.  

Finally we can consider some of the special aggregates that StatsCan calculates each month.  Excluding food and energy, CPI was up 0.5 percent in the year to August;  excluding only energy, up 0.7 percent; and excluding only gasoline, up 0.6 percent. Then there are the Bank of Canada's three preferred measures of core inflation, which averaged a 1.7 percent year-on-year gain. 

These are all very low numbers by historical standards, and well within the Bank's 2 percent inflation target. However, they do provide at least some support for the idea that the inflation that regular households are facing is a little higher than the media headlines suggest. It will be interesting to see what changes the Bank makes to its inflation targeting goals to address this discrepancy.