Inflation

Recommended reading, economic debates, predictions and opinions.

Over the next twelve months I expect

Deflation
1
2%
Steady prices (increases of less than 1%)
9
14%
Low inflation (1% to 3%)
42
66%
Medium inflation (3% to 6%)
9
14%
High inflation (more than 6%)
0
No votes
Don't know/don't care
3
5%
 
Total votes: 64

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ghariton
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Inflation

Post by ghariton » 19 Feb 2016 13:23

Statistics Canada has just reported that inflation, as measured by the CPI, is running at 2.0% per year, up from 1.6% last month.

What are your expectations over the next twelve months?

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Re: Inflation

Post by AltaRed » 19 Feb 2016 13:58

I picked 1-3% on the basis I believe it will be at the higher end of that range based on the Loonie staying at about the same level in 2016, give or take a few cents. Energy prices have about bottomed out and will have to go up, albeit slowly. We have not seen the end of imported food inflation. Tempered against those increases will be very poor GDP growth. JT's spending spree just won't move the GDP needle more than a few cents. As I have articulated recently - stagflation.
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Re: Inflation

Post by Shakespeare » 19 Feb 2016 16:49

I believe many of us concluded 8-10 years ago during RRB discussions that stagflation was the likely result of government policies - although I certainly didn't foresee negative RRB yields.
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Re: Inflation

Post by longinvest » 19 Feb 2016 22:26

As far as I know, the Bank of Canada will be actively working at keeping it within 1% to 3%.
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Re: Inflation

Post by AltaRed » 19 Feb 2016 23:53

longinvest wrote:As far as I know, the Bank of Canada will be actively working at keeping it within 1% to 3%.
I think they are slowly running out of options/levers to control inflation within desired levels. I have less confidence now in the Bank of Canada than at any time since the rampant inflation times of the '70s.
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Re: Inflation

Post by ghariton » 20 Feb 2016 01:54

longinvest wrote:As far as I know, the Bank of Canada will be actively working at keeping it within 1% to 3%.
I'm sure that they are working on it. But the traditional instrument to control inflation is monetary policy. I just don't see the BoC raising interest rates, or restricting credit, any time soon.\

Add to that the stimulus package that the federal government seems keen on. That should drive up the wages of skilled labour -- who are not exactly suffering from high unemployment.

Finally, the Canada/U.S/ exchange rate is a big factor, given the amount we import. FWIW, the twelve-month inflation component for food was up 4.0%. Must be all that cauliflower. :wink: Unfortunately, the BoC has little control over the price of oil, which is a big factor in driving the exchange rate.

So yes, the BoC will do its best to control inflation, and they may well succeed. But they face very strong headwinds.

My call is inflation of between 3% and 4%.

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Re: Inflation

Post by Shakespeare » 20 Feb 2016 05:16

3-4% would be a big jump.
cpi.png
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Re: Inflation

Post by longinvest » 20 Feb 2016 07:59

We're not is the U.S.:

FRB: Why does the Federal Reserve aim for 2 percent inflation over time?
Federal Reserve wrote: The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public's ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling--a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.
We're in Canada:

Monetary Policy - Bank of Canada
Bank of Canada wrote:
The Objective
The objective of monetary policy is to preserve the value of money by keeping inflation low, stable and predictable. This allows Canadians to make spending and investment decisions with more confidence, encourages longer-term investment in Canada's economy, and contributes to sustained job creation and greater productivity. This in turn leads to improvements in our standard of living.

Canada’s monetary policy framework consists of two key components that work together and reinforce each other: the inflation-control target and the flexible exchange rate.

The Inflation-Control Target
At the heart of Canada’s monetary policy framework is the inflation-control target, which is two per cent, the midpoint of a 1 to 3 per cent target range. First introduced in 1991, the target is set jointly by the Bank of Canada and the federal government and reviewed every five years. However, the day-to-day conduct of monetary policy is the responsibility of the Bank’s Governing Council. The inflation-control target guides the Bank’s decisions on the appropriate setting for the policy interest rate, which is aimed at maintaining a stable price environment over the medium term. The Bank announces its policy rate settings on fixed announcement dates eight times a year.


[...]

Canada’s Flexible Exchange Rate
Canada’s flexible exchange rate, or floating dollar, permits us to pursue an independent monetary policy that is best suited to Canada’s economic circumstances and is focused on achieving the inflation target. Movements in the exchange rate also provide a “buffer,” helping our economy to absorb and adjust to external and internal shocks.

[...]
There is an important difference between the monetary policies of the U.S. and Canada. In the U.S., the Federal Reserve is concerned with price stability and maximum employment. In Canada, the principal objective of the monetary policy is to keep inflation low, stable and predictable.

The Bank of Canada can take bold moves, if it needs to, like it did in January 2015. This can "help" or "hurt" the Canadian dollar and affect employment (helping or hurting imports and doing the reverse to exports), but it keeps inflation stable.

Let's check back, in January 2017, and see if CPI has increase more than 3% between December 2015 and December 2016. :)

Which number should we use, as a a basis for calculation?
  • Total CPI: 126.5
  • Total CPI (seas. adj.): 127.4
  • Core CPI: 126.1
I wouldn't use the second choice:

The Consumer Price Index: Data quality, concepts and methodology: Explanatory notes for tables
Statistics Canada wrote: A seasonally adjusted series is one from which seasonal movements have been eliminated. Each month, the previous month's seasonally adjusted index is subject to revision. On an annual basis, the seasonally adjusted values for the last three years are revised with the January data release.
My preference is for Total CPI, 126.5.
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Re: Inflation

Post by AltaRed » 20 Feb 2016 13:59

With already low interest rates and an already low loonie, the BoC really has few levers. Rising import prices will continue to put pressure on inflation and our comparatively new BoC governor is unlikely to countermand the increasingly free spending policies of the Libs by raising interest rates to put on the brakes of a sluggish economy. SP is not MC.
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Re: Inflation

Post by ghariton » 20 Feb 2016 14:26

longinvest wrote:We're not is the U.S.
Yes, it's true that, formally, the BoC has only one objective, to control prices, while the Fed has two targets, price stability and unemployment (or the state of the economy). In practice, however, the BoC very much takes into account the state of the Canadian economy, and tries to work with Finance (fiscal policy) to encourage growth.

I would be very surprised to see the BoC set monetary policy without regard for the economic stimulus that this government (rightly or wrongly) is committed to. That means low ongoing nominal interest rates, and negative real rates, for at least the next year.

But I may be wrong, and Mr. Polosz may see things differently.

As I've noted here before, the 2% inflation target is currently under review, with some pressure to increase it.
Canada’s monetary policy framework consists of two key components that work together and reinforce each other: the inflation-control target and the flexible exchange rate.
Yes. But it's been some time that the BoC has tried to influence the exchange rate, as far as I know. Even if it were to try, I suspect it would fail.

As I see it, we have had a devaluation of the CAD against the USD (remains to be seen whether it was temporary or permanent). Devaluations help the economy in the short term and buy breathing space, but at the cost of higher inflation (and loss of productivity, but that's another story). I see nothing that will neutralize that in the present case.
the target is set jointly by the Bank of Canada and the federal government and reviewed every five years.
Yes. That's the review that's going on right now. I'm certainly not privy to it, but I'm willing to guess that the government is pushing for a higher target. I'd bet three per cent.
My preference is for Total CPI, 126.5.
Agree. It's the one that best reflects my spending and standard of living.

If the CPI is higher that 130.3 for as reported in February 2017, for January 2017, I win. If it's lower, you win.

If you win, I'll buy you a beer.

George
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Re: Inflation

Post by longinvest » 20 Feb 2016 14:37

ghariton wrote:If the CPI is higher that 130.3 for as reported in February 2017, for January 2017, I win. If it's lower, you win.

If you win, I'll buy you a beer.
If we base it on January's number (January 2016's CPI is 126.8 ), you'll win if January 2017's CPI is higher than 130.6.

I'll settle for a virtual beer. I offer the same. (Unless we actually get to meet in person, one day, in which case I'll buy you the real thing*). :-)

* No, I'm not admitting defeat... yet.
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Re: Inflation

Post by longinvest » 20 Feb 2016 18:31

ghariton wrote:
the target is set jointly by the Bank of Canada and the federal government and reviewed every five years.
Yes. That's the review that's going on right now. I'm certainly not privy to it, but I'm willing to guess that the government is pushing for a higher target. I'd bet three per cent.
I'm inclined to think that the government would rather wait to increase the taget until after issuing its bonds to fund the increased spending. Otherwise, bond buyers might not be willing to pay much for bonds if coupons are lower than target inflation, after tax. It is better to tamper with inflation after the debt is taken with low rates. So, maybe there's still a chance for an unchanged target in 2016.

Increasing the inflation target would mess up with lots of existing plans across the entire economy, and it would damage the Bank of Canada's reputation. I don't think that they would do such a thing lightly. It's one thing to make hypotheses and try to predict their impact; that's something we want the Bank to do. It's another to go ahead with changing something that has worked for decades in favor of something new, unless we have proofs that a 2% inflation target is not sustainable and is really damaging to our economy.
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Re: Inflation

Post by kcowan » 21 Feb 2016 05:40

longinvest wrote:Increasing the inflation target would mess up with lots of existing plans across the entire economy, and it would damage the Bank of Canada's reputation. I don't think that they would do such a thing lightly. It's one thing to make hypotheses and try to predict their impact; that's something we want the Bank to do. It's another to go ahead with changing something that has worked for decades in favor of something new, unless we have proofs that a 2% inflation target is not sustainable and is really damaging to our economy.
I would be OK if they came out saying that the volatility in oil and exchange rate will cause an extraordinary target for one year. Does the cheap price of gasoline offset the higher cost of food imports?

It would be better than adjusting the food basket or otherwise fudging the CPI numbers.
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Re: Inflation

Post by patriot1 » 21 Feb 2016 10:25

longinvest wrote: I'm inclined to think that the government would rather wait to increase the target until after issuing its bonds to fund the increased spending.
But the amount of existing debt that has to be rolled over annually (around $100 billion) greatly exceeds the amount of new debt that might be issued, so I don't see the latter driving decisions.

Probably the bond market is going to pay more attention to the facts on the ground (i.e. inflation rate and total debt) than whether a new inflation target is announced or when.

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Re: Inflation

Post by Mordko » 21 Feb 2016 12:00

They won't increase the target, but the government might be printing a lot of money over the next few years. Also, oil will rebound (eventually) and China will stop deceleration. So, my bet - higher inflation.

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Re: Inflation

Post by Thegipper » 21 Feb 2016 20:13

I am in the other school. We saw a 30% decline in the Canadian dollar and got 2 % inflation. I suspect hat in countries like Japan and the USA it is lower. We have the demographics of an aging population , tremendous over capacity, central banks in a competition to reduce the value of their currency, interest rates at 2 or 3% for loans, virtually nothing on savings and very high government debt levels. The man behind Fairfax Financial believes we are looking at deflation and investing accordingly.

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Re: Inflation

Post by pitz » 07 Mar 2016 00:37

I vote deflation. Led by declines in the housing market, and the bankers tightening up credit significantly. Inventories seem to be pretty high at the car dealers, the house sellers, and even the grocery stores. Restaurants seem empty which means price wars are inevitable. Airfares have collapsed. The demand drivers of the past decade are rapidly disappearing.

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Re: Inflation

Post by FinEcon » 07 Mar 2016 10:05

pitz wrote:I vote deflation. Led by declines in the housing market, and the bankers tightening up credit significantly. Inventories seem to be pretty high at the car dealers, the house sellers, and even the grocery stores. Restaurants seem empty which means price wars are inevitable. Airfares have collapsed. The demand drivers of the past decade are rapidly disappearing.
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Re: Inflation

Post by Flaccidsteele » 24 Sep 2016 01:26

Good news as inflation remains low. Cost of living remains inexpensive.


Loonie Weakens as Inflation Data Raise Chance for BOC Rate Cut

The Canadian dollar fell after the country’s August inflation rate trailed even the most bearish forecast, boosting bets that a slowdown in the economy may require added monetary stimulus.

...

Core inflation, which measures consumer prices excluding eight volatile items, slowed to a two-year low of 1.8 percent, down from July’s 2.1 percent rate. The overall inflation rate decelerated to 1.1 percent, from 1.3 percent. Both readings lagged behind the lowest forecast in Bloomberg economist surveys, and analysts predicted overall prices would accelerate on the month instead of slowing.
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Re: Inflation

Post by Southafricanmi » 24 Oct 2016 07:52

Hi guys,

You guys needs inflation and we want to get rid of some of ours... :lol:

Your annual inflation experienced (in both the US and Canada) in some cases we see as our month to month movement in our headline inflation number (ok not that bad but it can get pretty bad).

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Re: Inflation

Post by longinvest » 25 Oct 2016 11:17

Government of Canada Renews Inflation-Target Agreement With the Bank of Canada
http://www.fin.gc.ca/n16/16-139-eng.asp
Maintaining low, stable and predictable inflation is essential to foster an environment in which middle class Canadians can prosper. Price stability contributes to balanced, sustainable and inclusive economic growth.

Minister of Finance Bill Morneau today announced that the Government of Canada and the Bank of Canada have agreed to renew Canada’s flexible inflation-target regime for another five years to the end of 2021. Under this renewed agreement, the inflation target will continue to be the 2 per cent mid-point of the 1 to 3 per cent inflation-control range.

The commitment by the Government and the Bank of Canada to this inflation-control target will ensure that Canadians continue to derive the economic and social benefits from low, stable and predictable inflation and will underpin confidence in Canada’s economic prospects in the coming years.
“Canada has a tried-and-true inflation-targeting regime, which was brought in 25 years ago. It has afforded Canadians low, stable and predictable price growth for a generation. Controlling the pace of inflation at a steady and low level protects the purchasing power of all Canadians and helps sustain growth and job creation.”

- Bill Morneau, Minister of Finance
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Re: Inflation

Post by longinvest » 25 Oct 2016 11:22

Actually, there was a joint statement of the Government of Canada and the Bank of Canada about it:
http://www.fin.gc.ca/n16/data/16-139_1-eng.asp
...
Over the past decade, the global economy has undergone significant economic and financial shocks. Monetary authorities have dramatically extended the limits of their policy toolkits to combat persistent weakness, guard against deflation, repair financial system functioning, and restore confidence. Given such challenges, monetary policy frameworks have themselves come under intense scrutiny.

Throughout this period, the Bank of Canada's flexible inflation targeting framework has continued to demonstrate its value. The well-established credibility of this framework has reinforced the Canadian public's confidence that monetary policy will continue to achieve the inflation target, and helped underpin the Canadian economy through challenging times. These benefits continue to be evident in the wake of the global commodity price shock, enabling monetary policy to support the complex adjustment in the Canadian economy while maintaining overall price stability.

Based on this experience, the Government of Canada and the Bank of Canada agree to renew the inflation target on the following basis:
  • The target will continue to be defined in terms of the 12-month rate of change in the total CPI.
  • The inflation target will continue to be the 2 per cent mid-point of the 1 to 3 per cent inflation-control range.
  • The agreement will run for another five-year period, ending 31 December 2021.
The Bank will continue its research into potential improvements in the monetary policy framework. Before the end of 2021, the Government and the Bank will review the experience over the five-year period, as well as any research insights, and determine the appropriate framework for the years ahead.
...
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Re: Inflation

Post by ghariton » 25 Oct 2016 13:34

Thank you.

Removes some uncertainty from my planning.

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Re: Inflation

Post by NorthernRaven » 25 Oct 2016 15:31

The September CPI release - 1.3%

No signs of hyperinflation yet... :)

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Re: Inflation

Post by Flaccidsteele » 25 Oct 2016 17:22

NorthernRaven wrote:The September CPI release - 1.3%

No signs of hyperinflation yet... :)
Very nice. Very comfortable. Hopefully it continues until I die.
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