Canada’s Industrial Inflation Backs-off

Canada's PPI in January fell by 0.5%, its second consecutive monthly drop, as it fell by 0.2% in December. Core prices fell by 0.3% in January after rising 0.5% in December. Of course, Canada trades closely with the United States; it shares the business cycle with the U.S. on most occasions, and there's a great deal of trade causing price developments between the two countries to tend to converge.

However, producer prices are showing slightly different trends right now between Canada and the U.S. The U.S. PPI that was recently announced accelerated in January and the U.S. core PPI accelerated as well. Canada's industrial prices have decelerated from 12-months to 6-months to 3-months and Canada's core industrial prices have fluctuated a little bit more, rising 3.6% over 12 months, accelerating to a 3.9% pace over 6 months then decelerating to a slower 2.6% annual rate over 3 months. U.S. headline PPI prices show some tendency to move lower, although the three-month inflation rate picks up compared to the 6-month inflation rate for the headline. The U.S. PPI core shows a considerable pickup in inflation over 3 months compared to 6 months. These features cause the U.S. pattern for prices to look different from the Canadian pattern.

Still, Canadian price inflation shows industrial prices up by 5.4% over 12 months with the core up only 3.6% over 12 months; that's a substantial difference. Core prices in Canada appear to be much better behaved; for gains over 12 months, 6 months and 3 months, the strongest gain over those horizons is the 3.9% gain over 6 months. The 3-month gain is down in a normal range rising at just a 2.6% pace.

Canadian CPI Canadian CPI prices are not yet available for January, but as of December the CPI had decelerated from its previous pace of 6.9% year-over-year to 6.5%. Canada's CPI X measure fell to a 5.4% pace in December from 5.8% in November. Canada's CPI core has been somewhat steadier at 5.5% for two months in a row, but that represents accelerations from earlier, in the year.

Canadian economy Canadian retail sales, in fact, show signs of trouble brewing; real retail sales fell by 0.4% in November after being flat in October and falling in September. The decline in real retail sales over 6 months is at a 3.1% pace and over 3 months it remains about the same at a 2.9% decline pace. Both of those indicate significant weakening in the consumer sector. Canada's housing sector is weak as well with housing starts falling in recent months. Starts still are higher, rising by 1.3% over 12 months, but they're falling on shorter horizons. Starts fall at an 8.7% annual rate over 6 months and have a 16.6% annual rate of decline over 3 months. Mortgage rates in Canada have crept up to 5.9% as of December which is the most recent reading we have for Canadian housing starts. Industrial orders in Canada have fallen off sharply; they're dropping out of 25% annual rate over 3 months and at a 16% rate over six months although they're up by 4.8% over 12 months as of December. Shipments, however, are still growing over 3 months at a 3.5% pace, and that's up from a 3.7% annual rate of decline over 6 months. So Canada also shows some of the cross currents we see in U.S. data. Still, shipments have fallen for two months in a row. Employment in Canada is growing; as of January employment grew at a strong 3.9% rate over 12 months, its strongest pace since July. The unemployment rate has migrated down to the 5% mark, its lowest reading since July of last year.

Comparative trends Canadian data are showing slightly more weakness than what we're seeing out of the U.S. at the moment and that may account for the reason that producer prices are showing a little more weakness than we see in the U.S. However, like in the U.S., Canadian job market signals remain firm. Weakness is exhibited in retail spending by consumers as well as in housing and in industry.

Summing up Canada still has a significant inflation problem we see by looking at the CPI. The PPI which tends to be more volatile may be a little more sensitive to trends and act like the canary in the coal mine. It may be hinting that inflation is turning lower faster. But it will take some time to see if that trend stays in place, particularly with the acceleration we're seeing in producer prices in the United States as well as the stubbornness in consumer prices. The US and Canada can only have divergent trends for so long because of their connection through trade.