U.S. and Canadian Interest Rate Hikes may depend on Logistics

Nov 27, 2014

For October, U.S. year-over-year all-items inflation was +1.7%, according to the Bureau of Labor Statistics. The “core” rate, which omits volatile energy and food items, was the smallest of increments higher, +1.8%.

2014 11 27 Day in the Life Graphic

In Canada, the comparable figures were more elevated, +2.4% and +2.3% respectively, as calculated by Ottawa’s data agency.

Canada imported its faster pace of price advance. With the decline in value of the Canadian dollar relative to the U.S. dollar as this year has progressed, the cost of bringing goods from the south to the north has risen.

The change in the exchange rate has not only affected the price of goods imported into Canada, it has also been impacting commodities produced and sold within the country.

The international price of oil has been slumping. After a long period of stickiness near $100 USD per barrel, it has slipped below $80 USD.

That 20% drop, however, hasn’t been fully realized in Canada. During essentially the same time frame, the “loonie” (i.e., Canada’s currency) has retreated from par with the U.S. greenback to currently stand near 88 cents, a decline of 12%.

On balance, the pull-back in the U.S.-dollar-denominated price of oil has been almost two-thirds matched by a weaker loonie.

Notice how convenient it is that the bases for both the currency (i.e., “parity” at $1.00) and world oil price ($100 USD) percentage-change calculations are 100.0.

October energy prices in the U.S. consumer price index (CPI) were -1.6% year over year. In Canada, they were +4.2%. 

While gasoline prices in the U.S. were -5.0% year over year in the latest month, Canada’s rate of change was +0.6%.

The Federal Reserve has finally ended its earlier massive bond-buying program (also known as “QE” or quantitative easing). There is considerable evidence ˗ especially from labor market statistics ˗ that the U.S. economy is on a solidly sustainable growth path.

Prognosticators will be continuing to focus their attention on the timing of the first federal funds rate increase.

The tea leaves they’ll by watching closest will be those providing insight into where prices are headed.

Since world trade remains weak and commodity prices for energy, metals-and-minerals and agricultural products are still slumbering, there is an expectation that the first “commotion” may be heard in labor markets.

America’s unemployment rate has fallen to 5.8%. A degree of tightness is already being experienced in some employment categories.

For example, even a cursory search of the Internet reveals that there is a severe shortage of truck drivers. Haulage firms are offering incentive wage increases to make up the shortfall.

Once the jobless rate drops closer to the 5.0% benchmark, hiring difficulties across multiple employment descriptions are likely to appear.

Canada’s official unemployment rate is 6.5%. Statistics Canada has also lately been publishing a number that is calculated according to the same criteria used by the U.S. Department of Labor. It adopts a stricter definition of who is really, truly, “honest-to-goodness” looking for work.

According to this yardstick, Canada’s unemployment rate is almost exactly the same as in its neighbor.

U.S. year-over-year average hourly earnings across all industries in October were +2.2%. Average weekly earnings were +2.8%. You’ll notice that both those figures are above the nation’s overall inflation rate of +1.7%.

Here’s where our analysis of inflation begins to walk a different path. Limiting the analysis to the duopoly of materials and labor costs is anachronistic.

We’ve already seen that currency fluctuations can play a big role.

There is another aspect of the economy, combining both material and labor issues, that is coming under increasing stress – logistics.

Because so much oil is now being moved by rail, other materials are being periodically bumped off the tracks, including coal, cement and prairie grains.

As a consequence, there have been “faux” shortages of such materials and delays in delivery times for customers, with ripple effects further down the supply chain.

On the U.S. West Coast, an increasing volume of consumer goods entering the country from overseas ˗ thanks to a cyclical pick-up in discretionary spending by individuals and families ˗ combined with labor unrest, is causing bottlenecks at the ports of Los Angeles and Long Beach.

Also, shipyards are building larger ocean-going vessels, to take advantage of the expanding Panama Canal. Not all ports have the necessary channel depth to handle the new behemoths, nor the crane capacity to offload them quickly.

There are also the wasteful delays that freight trains are encountering as they attempt to cross the mighty mid-country transportation hub of Chicago. Computerized signaling systems that need upgrading, plus confusion caused by a multiplicity of track owners, are the problems.

It’s easy to see from the discussion so far why the need for infrastructure construction remains such a hot topic.

In both countries, there are backlogs of bridge repairs to be carried out. Some states, such as Pennsylvania, are unilaterally addressing their own structural deficiency problems. The work will be proceeding within a PPI (public-private partnership) framework.   

The PPI model has proven effective in Canada, offering both alternative financing and speedier time-to-completion schedules. More government owners in the U.S. are about to give it a test drive.   

Canada inflation – all items CPI vs CORE*
(not seasonally adjusted)
Canada  inflation – all items CPI vs CORE
In Canada, the October 2014 year-over-year change in the energy sub-component index was +4.2%. Gasoline was +0.6%.

The Canada figure (CPI) is the All Items Consumer Price Index. *Core inflation has been defined by the Bank of Canada. It is the Consumer Price Index (CPI) excluding the eight most volatile components: fruit, vegetables, gasoline, fuel oil, natural gas, intercity transportation, tobacco and mortgage interest costs. It also excludes the effect of changes in indirect taxes on remaining items. The core inflation rate in Canada is monitored with respect to setting interest rate policy. The target range is 1% to 3%.
Data source: Statistics Canada.
Chart: CMD.
U.S. inflation: all items (CPI-U) vs all items less food and energy
(not seasonally adjusted)
U.S. inflation: all items (CPI-U) vs all items less food and energy
In the U.S., the October 2014 year-over-year change in the energy sub-component index was -1.6%. Gasoline was -5.0%.

The U.S. figure (CPI-U) is the All Items Consumer Price Index for All Urban Consumers.
Data source: U.S. Bureau of Labor Statistics (Department of Labor).
Chart: CMD.

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