Wednesday, April 3, 2013

Inflation is back -- maybe, hopefully, it could still happen

So earlier this week StatsCan published the IPPI; basically the price of industrial production and the RMPI that shows the rise in cost of raw materials.  Good news if you are from the Bank of Canada -- that has been desperate to get inflation back on track of the 2% to 3% zone.  IPPI and RMPI are both up after having been flat for months.

Both charts show one thing -- which is not especially good, all the price increase in industrial production comes from raw material costs -- none of it from general price inflation -- in an economy that is 60% services -- that's a reflection of a weak economy.  There is no pricing power.

Canada's policy makers have run out (like the rest of the world) of macro-economic tools to affect the economy.  Interest rates are low, velocity of money is not rising (which is different than falling) and the fiscal tool shed is empty -- mainly because the government will not consider an expansionary (and deficit growing budget) so that they can achieve their targeted zero deficit by 2014/15.

Canada's problem is far less serious than the rest of the world -- still low growth and zero-bound interest rates cause all kinds of long term problems, most Canadian have not noticed by pension funds obligations are discounted at a rate of 7.25% -- its the law here.  IN reality the discount rate is far lower -- in the 2% to 4% range (depending on duration you are considering).  That means that pension funds are underestimating future (discounted) liabilities -- never mind their current dilemma that  the risk free rate of investment is around 2% (and not 5%).  Statistics will show that immigration is growing in Canada; you see it everywhere -- but that GDP growth (and labor) are nearly flat. 

All this to say that the Bank of Canada got some OK news earlier this week -- inflation in the raw material sector is good for Canada's exports, but the economy is still in a funk, the real bet is that the U.S. can be there for us!


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