Thoughts

April 23, 2021 | 13:17

Inflation Simmering

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

With the U.S. and Canadian March CPI reports now in hand, we can take their pulse just before the annual rates rev higher this spring due to low base-year effects. Of special interest: Are rising business input costs due to supply-chain disruptions, isolated labour shortages, and flaring resource prices spilling over to consumers?

Before drilling into the CPI, let’s start with a bird’s eye view. Curiously, both the U.S. and Canadian standard core rates (i.e., excluding food and energy) are precisely at their mean of the prior eight months (1.6% y/y and 0.9%, respectively), and both have fallen since the start of the pandemic. While the average of the Bank of Canada’s three core metrics is running hotter at 1.93%, its 0.16-ppts rise in the past year is mild considering the intense pressure on input costs. Headline inflation is running above the core in both countries, at 2.6% in the U.S. and 2.2% in Canada, largely due to surging gasoline prices, up 23% and 35%, respectively. Moreover, food costs are on the boil in the U.S.... items consumed at home are simmering 3.3% and items consumed outside are up 3.8%. However, apart from an 11% spike in eggs, food prices are less spicy in Canada, up 1.3% at home and 2.8% at restaurants.

Within the core, prices for several items are starting to burble louder. Household appliances are up 5.6% in Canada and 7.9% in the U.S. Household operations are running 4.3% faster in the U.S., while Canada's homeowner replacement costs have leaped 7.9% and are poised to shoot much higher given the parabolic rise in home prices. Autos are more expensive than a year ago, by 3.5% in Canada and 9.4% for used vehicles in the U.S. (1.5% brand new). This is likely due to chip shortages causing temporary closures of some major plants. Another worrisome sign is that U.S. personal care services (e.g., hairdressers) are up 5.9%, nearly twice as fast as a year ago, due to storming pent-up demand and, possibly, less competition among the survivors.

Still, there are many other areas where prices are either falling or still rising slowly. Despite a pickup in air traffic, airfares are down 15.1% in the U.S., and have only recently ticked up in Canada after sinking last year. Hotel rates are off 17.2% in Canada and 8.1% in the U.S., though the latter is starting to turn around amid increased travel. Clothing is down 5.4% in Canada and somewhat less in the U.S, while residential rent is up just 0.6% and a moderate 2.0%, respectively. Recreation costs are rising only modestly in each country.

Bottom Line: While inflation at the consumer level is far from boiling over, pressures are starting to stir beneath the surface. Stay tuned.