Statistics Canada Releases Consumer Price Index Results for March 2021

The Consumer Price Index (CPI) rose 2.2% on a year-over-year basis in March, up from a 1.1% gain in February. A significant proportion of this increase was attributable to a steep decline in prices in March 2020, as the monthly CPI rose 0.5% in March 2021. On a seasonally adjusted monthly basis, the CPI increased 0.1% in March. Excluding energy, the CPI rose 1.1% on a year-over-year basis.

As Canada marked the end of the first year of the COVID-19 pandemic, price growth in March 2021 was accentuated by what is known as base-year effects, originating in March 2020. The broad decline in prices in spring 2020, when headline CPI growth slowed to 0.9% in March 2020, had an upward impact on consumer inflation in March 2021. As the upward impact of these temporary base-year effects will influence the 12-month movement over the next few months, the historical movements affecting current growth trends will be examined.

Year over year, consumer price growth increased within a context of rising consumer confidence and improving employment conditions as COVID-19 restrictions eased in many regions of the country.

In March, prices rose in five of the eight major components year over year, with transportation (+7.1%) and shelter (+2.4%) prices contributing the most to CPI growth. Compared with March 2020, consumers paid less for clothing and footwear (-5.4%) and for household operations, furnishings and equipment (-0.2%).

Homeowners’ replacement costs push shelter prices higher
Shelter prices rose 2.4% on a year-over-year basis in March. As costs for building materials and demand for single-family homes continued to grow, the homeowners’ replacement cost index, linked to new home prices, increased 7.9% year over year. The rise in the homeowners’ replacement cost index, which comprises about 5% of the CPI basket weight, was partially offset by a drop in the mortgage interest cost index. The mortgage interest cost index, which makes up about 4% of the CPI basket weight, fell 6.3% year over year.

Regional highlights
Year over year, prices rose at a faster pace in March than in February in every province, primarily because of higher gasoline prices. Rent prices rose in all four Atlantic provinces year over year in March: New Brunswick (+4.8%), Prince Edward Island (+2.9%), Newfoundland and Labrador (+2.2%), and Nova Scotia (+2.0%). Higher demand as a result of increased migration and fewer homes for sale contributed to the increase.

Source: Statistics Canada

U.S. Consumer Prices Post Biggest Gain in 8½ Years as Economy Re-opens

U.S. consumer prices rose in 0.6% March for the fourth month in a row. The rate of inflation over the past year shot up to 2.6% from 1.7% in the prior month, marking the highest level since the fall of 2018, underscoring new pressures emerging on the economy as the U.S. recovers from the coronavirus pandemic.

The yearly rate of inflation is widely expected to surge in the next few months. A chief reason is a faster U.S. economic recovery fuelled by massive fiscal stimulus and a sharp drop this year in new coronavirus cases. That’s boosting demand for a wide array of goods and services at a time when when many key materials are in short supply.

Inflation also turned negative March and April of 2020 in the early stages of the pandemic when the U.S. economy was largely locked down. As those readings drop out of the 12-month average, it will make inflation even worse.

The yearly rate of inflation is likely to settle down later in 2021, but it could top 3% in the near future and put more pressure on the Federal Reserve to tighten monetary policy. The last time inflation topped 3% was a decade ago.

Fed leaders insist any increase in inflation is likely to be mild and temporary. The Fed predicted in March that inflation would average 2.4% in 2021, using its preferred PCE price measure. The rate of inflation would then drop back down to the central bank’s 2% target by 2022.

What’s driving the numbers?
The cost of gasoline jumped again and accounted for almost half of the increase in the cost of living in March. Gas prices leaped 9.1%. Oil prices are on the rise because of production cutbacks by energy companies and higher consumer demand as Americans get back on the road or take to the skies again.

The cost of food edged up a scant 0.1%, but prices are expected to rise somewhat faster in the coming months, particularly for takeout and meals prepared outside the home. A separate measure of consumer inflation that strips out food and energy rose a smaller 0.3% last month. The so-called core rate has risen 1.6% in the past year, up from 1.3% in the prior month.

Prices also increased last month for rent, auto insurance, used vehicles, home furnishings, recreation and personal-care items. The few products or services to decline in price included clothing and educational services.

What’s the long term forecast?
There’s no doubt inflation is rising in the U.S. and will continue to do in the months ahead. Part of the increase simply reflects a natural rebound after the rate of inflation nearly fell to zero early in the coronavirus crisis.

The strains on the global economy from the pandemic are also feeding into higher prices. Some key supplies are hard to come by because of production or shipping disruptions caused by the pandemic and that’s pushing up inflation.

The faster than expected U.S. economic recovery is playing a role, too. Businesses have been taken aback by the sharp increase in demand for new cars, houses and many other goods and services. Some economists contend government fiscal stimulus is excessive and contributing to the surge in demand.

When inflation levels off is anyone’s guess. A recent survey shows that business economists believe the threat of rising inflation is the highest in decades.

If inflation charges past 3% or heads even higher, pressure on the Fed to raise interest rates or junk its easy-money strategy are likely to grow. And it will become more expensive for consumers to buy a car or house or for businesses to obtain a loan, all of which could threaten to slow the recovery.

“Inflation is a process and not a one-time event,” said Chris Low, chief economist at FHN Financial in New York. “These bottlenecks are one offs. The Fed will not consider action until it views price levels changes as permanent rather than temporary, something it does not consider possible until the economy is at full employment.”

Source: Globe and Mail
Source: Wall Street Journal
Source: Market Watch