Canada's headline CPI rose 3.6 percent in the year to May, according to new data released by Statistics Canada this morning. This was the fastest increase in exactly ten years, slightly above market expectations and a further rise from the 3.4 percent gain posted in April. There is, however, one significant difference between the two months. The April increase was heavily influenced by "base effects", with April 2020 having been the low point in the first wave of the pandemic, but these effects were much less prominent in May: current inflationary pressures are now a more important factor.
Price pressures in May were broad-based, with all major components of the index higher year-on-year. The 4.2 percent rise in shelter prices was the fastest since 2008, while a 4.8 percent rise in prices for durable goods was, remarkably, the fastest since way back in 1989. The year-on-year rise in gasoline prices slipped to 43 percent in May from 63 percent in April as the base effects unwound. If gasoline is omitted from the calculation, the year-on-year increase comes in at 2.5 percent, still noticeably above the Bank of Canada's 2 percent target.
There is little consolation for the Bank in its three "preferred" core measures of inflation. Each of these moved higher in the month, with one -- CPI-trim -- reaching 2.7 percent, the highest it has been since November 2008. The Bank's conviction that the spike in headline CPI will fade beyond Q3 may yet prove correct, as the base effect for gasoline continues to unwind and other commodity prices, notably lumber, show signs of rolling over. Still, the acceleration in the preferred measure cannot be ignored for much longer if the Bank wishes to maintain the credibility of its inflation targeting regime.
Of course, today's data from Canada pale in comparison with the corresponding US CPI data for May, which were released last week. Headline CPI rose 5 percent year-on-year, its biggest gain since 2010, while CPI excluding food and energy saw a rise of 3.8 percent, the fastest since 1992. As in Canada, there are base effects in play, reflected most notably in the 28.5 percent rise in energy prices, though this was also influenced by the Colonial pipeline shutdown. However, also as in Canada there are signs of broader price pressures. Much of the media attention has focused on a huge surge in used car prices, but there are also broad indications that supply chain issues are putting upward pressure on prices.
The question in both countries is whether the monetary authorities will be forced to respond to these developments. The Federal Reserve's statement at the conclusion of this week's two-day session makes it plain that it is in no rush to start tightening policy settings. Indeed, it's somewhat striking that the opening sentence of the statement looks almost like a defiant statement of intent: The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
In practical terms this means that the Fed is keeping its funds target at 0-0.25 percent and maintaining the current pace of quantitative easing. The statement reiterates its desire to see inflation "moderately exceed 2 percent for some time". It is not clear whether a 5 percent rate meets the Fed's definition of "moderately", but the fact that the statement made no acknowledgement whatsoever of the significantly higher data seen in the last two months can perhaps be taken to mean that it still thinks the spike will be short in duration.
The Fed says that The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. This is intentionally vague but does not in any way suggest that a change of stance is coming any time soon. For now markets seem willing to trust the Fed, perhaps more than they did a few moths ago, but another print or two like that seen in May could start to change that.
No comments:
Post a Comment