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Producer inflation is a worry for the Canadian economy:Stagflation signal?

While the Canadian CPI Index has recently felt a bump, there reality for producer price is one of very heavy inflation.  In October, the Industrial Product Price Index (IPPI) and the Raw Materials Price Index (RMPI) were up 0.5% and 1.7% respectively from September. Both indexes advanced mainly because of petroleum and metal products.  Importantly, excluding petroleum and coal prices, the IPPI would have remained unchanged in October.

(Source: Statscan)

The story for the Raw Materials Price Index (RMPI) is one of strong year on year inflation.  They increased by 1.7% in October, primarily because of higher prices for mineral fuels (+2.0%), non-ferrous metals (+2.8%) and vegetable products (+5.1%). Crude oil prices were up 2.5% in October, after falling 3.7% in September. Excluding mineral fuels, the RMPI would have increased 1.4% in October, continuing its upward trend that began in July 2010.

(Source:Statscan)

Compared with the same month a year earlier, the RMPI rose 5.0%, following a 5.7% advance in September. Year-over-year, the RMPI has been on an upward trend since November 2009. Prices of non-ferrous metals (+15.4%), vegetable products (+23.5%), animal and animal products (+9.3%) and ferrous materials (+18.6%) were the main contributors to the RMPI year-over-year increase in October. Mineral fuels (-2.5%) and wood products (-0.4%) registered the only year-over-year declines.

Excluding mineral fuels, the RMPI would have increased 12.2% compared with October 2009, the largest advance in the last 12 year-over-year movements.

This data is problematic, on one side the BoC is finding that GDP growth is seriously below expectation (although tax receipt have so far been substantially above expectation), but prices are rising more quickly than the BoC would want, and is testing the Canadian government’s stated 2% inflation target – the core of the BoC’s mission is price stability and not employment.

Could Canada be entering a stagflation spiral?  Is the American QE2 experiment exporting U.S. inflation to its main trading partners?

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