Unwelcome Inflation Slowdown In April

The April data for inflation sends a worrying signal. Far from highlighting price pressures, the report shows that consumer prices are slowing too harshly for comfort. If such a trend were to be confirmed in the months ahead, inflation would turn from not being a constraint for accommodative monetary policy to a reason for monetary policy to be accommodative.

Import prices were down by 2.6% y/y and by 0.3% excluding petroleum products. Core producer prices for finished goods kept the same pace of increase as of the previous two months (+1.7% y/y), and consumer prices were up 1.1% y/y and 1.7% excluding food and energy, further decelerating from already subdued inflation in March.

There is no surprise that inflation is not accelerating. For price pressures to appear either production costs have to accelerate or demand has to be larger than demand. As for costs, the main one is labour. On that front, even if conditions are gradually improving, the unemployment rate remains high enough to prevent wages from accelerating. Additionally, even if it slowed, labour productivity remains robust. In Q1 2013, unit labour costs were indeed up a very limited 0.5% (quarterly annualised rate). As for supply, there are large rooms of improvement as shown by the still large output gap.

The recent deceleration in inflation could be a cause for concern. Until recently, the slower rate of price increases was obvious when measured with the deflator for private consumption expenditures but more questionable when measured by the consumer price index.

With March and April CPI reports, this changed. The index for non-food non-energy consumer prices has been decelerating from 2.1% in 2012 and 1.9% in Q1 2013 to 1.7% in April. Using a narrower measure (excluding fruit, vegetables, gasoline, fuel oil, natural gas, homeowner equivalent rent of primary residence, inter-city transportation and tobacco products, following the preferred measure of the Bank of Canada), the trend is even more pronounced. This “augmented”-core CPI was up by a limited 0.6% y/y in April, following 1.0% in Q1 2013 and 1.7% in 2012. This is the slowest pace of growth since end-2010.

If such a trend were to be confirmed in the months ahead, inflation would turn from not being a constraint for accommodative monetary policy to a reason for monetary policy to be accommodative.

BY Alexandra ESTIOT

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