Canadian inflation: 2.2%

Canada’s inflation rate hit 2.2% in May, jumping from Aprils official rate of 1.7%.  The dramatic increase is blamed mostly on increasing fuel cost:

Statistics Canada said gas prices rose 15 per cent in May from a year earlier, up from a year-on-year pace of 11.6 per cent in April. Excluding gasoline prices, the 12-month growth in the CPI in May was 1.6 per cent, it said.

Meanwhile core inflation, which excludes volatile energy and food prices and which the central bank monitors for underlying price pressures, rose 1.5 per cent in May from the same month last year – the same pace as the 12-month increase in April.

“Lower prices for passenger vehicles dampened the upward pressure on the core index,” the agency said.

Last week, the Bank of Canada surprised markets by not cutting its key interest rate and expressing concern over growing inflationary pressures. The key rate remains at three per cent.

Thursday’s CPI number surpassed the central bank’s two per cent target.

Most economists had expected May’s inflation rates would be around 1.9 per cent.

We could always deal with inflationary concerns the way Argentina does – They’ve managed to maintain a remarkable 0.6% official inflation rate in May thanks to the innovative way they calculate the figure:

According to the new methodology, every time a product’s price rises too sharply, it will simply be removed from the index on the ground that consumers will be deterred by the expense and switch to other goods.

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bcubbins
bcubbins
12 years ago

“Historically variable rates almost always beat fixed rates in terms of total borrowing cost.”

Going forward, as rates rise from 4% to x%, it is more likely that fixed rates will be your friend.

Why do think this would be the case?? With a variable rate, the borrower bears the interest rate risk. With a fixed rate, the lender takes on that risk and will charge a premium for doing so.

So going forward from any point in time, I'd expect that on average a variable rate will end up costing the borrower less. Whether that actually turns out to be true in hindsight depends on how accurately the lender had predicted future interest rates.

well said
well said
12 years ago

I have faith that the market may be indicating nothing more than incompetence and greed at any given moment.

Most people attribute intelligence to the market. Aetakeo has correctly articulated what many (most?) refuse to recognize.

patriotz
patriotz
12 years ago

If a student needs a laptop computer for their university education they’d buy a system twice as good today as they would have two or three years ago

They also have the choice of buying that 2 or 3 year old computer way, way cheaper than it was new. That's an apples to apples comparison.

Technological advancement in new goods drives down the price of used goods.

jesse
jesse
12 years ago

"Listen, it’s well documented that many gov’ts use a variety of techniques to under-report “inflation” (wrongly defined, btw) – the are reporting price changes, not inflation (an increase in supply of money/credit"

You can look at TIPS and RRB yields to see how well the CPI compares to what the market expects for inflation. You are welcome to know better. Driving constituents into poverty is not always the best policy for getting re-elected, right now especially true if you're the British government.

cashisking
cashisking
12 years ago

If CPI was calculated as it was in the early 80's our annual rate would be 10.4% … interest rates are going higher, long bond yields are going up, as are mortgage rates …

But not in Vancouver, it's different out here!

Alpha_Bear
12 years ago

"If farmers innovate and figure out how to produce twice as much wheat at the same cost, prices would drop…"

Farmers currently maximize production by adding as much fertiliser, pesticides, and other 'inputs' as necessary to produce the maximum yield. With rising oil, natural gas, and potash prices, farmers will have to calculate how much fertiliser to add in order to maximize their profit. Wheat production is not likely to rise.

aetakeo
aetakeo
12 years ago

By corollary you are saying government bond rates determined on the open market by tens of thousands of bond traders and in direct competition to other similar instruments from around the world are not correct. Given the DotCom meltdown and the subsequent insanity of the sub-prime derivatives trade, and given that tens of thousands of economists and traders believed in the housing boom, I've become really comfortable with the idea that tens of thousands of anybodies can be radically incorrect. The herd seems to move based on really local indicators of potential profit, which means that Tulip Mania makes sense for some value of sense. Seriously, having watched two bubbles, both times scratching my head as to WTF people were thinking, I have faith in the market correcting over time, and I have faith that the market may be indicating… Read more »

blueskies
blueskies
12 years ago

when satv is backing up rob a you

just know the end is near!

price will effect the buyers

the affection for the effect

affected the effective effect

scc
scc
12 years ago

"As for government bonds, if yields are off base, the currency moves to make the market."

My comment was a bit off. Central banks work off of their target rate which affect the general rates offered in the economy. In the states, treasury bonds are auctioned setting their yield. The currency moves as a function of the demand which is affected by the relative yields.

Anonymous
Anonymous
12 years ago

Historically variable rates almost always beat fixed rates in terms of total borrowing cost.

Impossible to justify such a conclusion. Adjustable rate mortgages weren't even legal in the US until 1982, meaning our entire history with them has been during a 2 decade long secular bear in interest rates.

scc
scc
12 years ago

Jesse, I'm not following your train of thought. CPI really only affects rates through a central banks desire to keep the CPI in a target range. It affects everyone else based on expectations on what a central bank will do.

As for government bonds, if yields are off base, the currency moves to make the market.

-A-
-A-
12 years ago

“I do feel that the government currently does under-report CPI and creatively uses hedonics to the public’s detriment.”

It's a fact. Common sense confirms it everyday, eventually most people's purchasing power will be so eroded, a serious recession will set in.

John
John
12 years ago

Dion has just announced a plan to ensure the Liberals will not win the next election. I would say an election is now guaranteed to occur soon.

mechie
mechie
12 years ago

"By corollary you are saying government bond rates determined on the open market by tens of thousands of bond traders and in direct competition to other similar instruments from around the world are not correct." Listen, it's well documented that many gov'ts use a variety of techniques to under-report "inflation" (wrongly defined, btw) – the are reporting price changes, not inflation (an increase in supply of money/credit – too much to explain here). This isn't discussed in MSM, but it's been well documented over many years. Others on this site can elaborate. Furthermore, this low long interest rate period we've experienced (VHB is correct – that cycle is over) has been driven by multiple factor, including vast sums of price insensitive, mercantilist money recycled from Asia & the Middle East recycled into Western gov't bonds. The presumptive corollary isn't the… Read more »

jesse
jesse
12 years ago

"I do feel that the government currently does under-report CPI and creatively uses hedonics to the public’s detriment."

By corollary you are saying government bond rates determined on the open market by tens of thousands of bond traders and in direct competition to other similar instruments from around the world are not correct.

scc
scc
12 years ago

Don't let the high tech aspects of computers confuse the issue. If farmers innovate and figure out how to produce twice as much wheat at the same cost, prices would drop and the respective component to the CPI would decline. This is no different from silicon foundries moving from 1um to 65nm and from 8cm to 30cm wafers or for hard drive manufacturers making a 300GB hard drive with a single platter vs. 3 just a few years ago. The price of an "equivalent" computer has to decline. I am not advocating that the government use a linear relationship between CPU frequency to the computer component in the index, but it does need to reflect the reduced costs/improvements to stay valid. The flip side would be that the CPI would be too high relative to reality. I do feel that… Read more »

Thums up2
Thums up2
12 years ago

comment#9 "If you want to beat inflation you should move downtown,if you work there." Yeah rob a,some one actually did analysis to show how the commute time+gas price will effect the buyers who chose valley over vancouver now they must consider moving back where the actions are on free of gas infront of their doors,right rob a? cafe,skirts,bikini's,and the Canadaline, world famous shopping promenade, bussiness district wine, beach,resturant etc, or sit in or out of the library you will be fine every single task consider saving $5 then count the total activities from work to the beach then multiply by 30/31 days of month – inflation=no inflation. From cambie to davie from west side granville to robson denman to english bay form burrard to millville from yaletown to gastown from west hasting to stanley park ladies and gentlemens Vancouver peninsula… Read more »

-A-
-A-
12 years ago

I like the fact the greedy fools are missing all the signals, and aren’t yet fleeing the market like rats out of a sinking ship.

The inventory glut is building because the market is scraping from the bottom of the barrel for new entrants into the Ponzi scheme.

It will be out of the seller’s hands, there will be virtually no market left for the inflated boxes, but they will still hang on to the hope that next spring the market will pick up, while more boxes get built.

The only way they can keep this illusion afloat for a while longer is if they can engineer a 65 year mortgage and sell it to the prepubescent foreign investors.

dingus
dingus
12 years ago

"you should move downtown if you work their!"

Buoy, dew eye here ewe!

Drachen
Drachen
12 years ago

I should have added.

The government tracks price when quality/price goes down.

But when quality/price goes up they insist on tracking quality.

They're only too happy to substitute hamburger for steaks when meat prices are rising. But as computer quality rises they track 'quality' and say a basic model computer today is worth twice as much as a few years ago.

freemarket
freemarket
12 years ago

so much for free market eh? look at what it brought us, speculators that do nothing but run up prices on houses, fuel and food. now the whole world is suffering because there are some people are making a lot of money from things that are not worth as much as they are paid for. someone remind me again how much these gas companies are making? free market is based on supply and demand and for the last decade we're always victims of artificial shortages which drive prices up. maybe its time we adopt a new ideology because both socialism and capitalism just wouldn't work in our world today. that is until people start to figure out how to abuse the next one.

Drachen
Drachen
12 years ago

"In principal, there should be some adjustment as goods improve."

I disagree. Mostly because as soon as you allow wiggle room you're opening the floodgates.

Computers are a great example. If a student needs a laptop computer for their university education they'd buy a system twice as good today as they would have two or three years ago. They'd pay the same amount but the government says because the RAM and CPU are twice as powerful the cost of that computer has actually deflated by 50% or so.

It's just a cheat to artificially lower inflation rates, the primary purpose of which is to cheat people out of their pensions and 'cost of living' wage increases.

blueskies
blueskies
12 years ago

you should move downtown if you work their!

rob a

there is no their there!

they are where their there is

scc
scc
12 years ago

Hedonic regression or hedonic demand theory is the economic term for this. In principal, there should be some adjustment as goods improve.

The problem rests is the conflict of interest the government has in determining this number (indexed entitlement payments, TIPS, etc.)

exx
exx
12 years ago

Western Forest Products lays off 2,000 workers

Cedar has been one of the few B.C. forest products where demand has remained strong but it is beginning to soften, Western said. Other markets – the U.S. and Japan – remain weak.

The Western announcement pushes the number of unemployed B.C. forest workers up to more than 12,000.