Inflation in North America:

Outside of Energy, It Is Gathering Strength

While the "headline" numbers look passively benign, when energy is factored out, both Canadian and US Consumer Price Index (CPI) data show inflation creeping higher.

Canada:

• April CPI fell .1%, the "core rate" was unchanged from March.
• Year over year (last 12 months), April CPI was +.8%, the "core rate" was +2.3%.
• Gasoline prices were down 21% in April, 19.2% year over year.

• All components except transportation rose.
• Looking forward, when the impact of energy is reversed in 9 - 12 months time, the CPI headline number is going to shoot higher, with everything else being equal.
• Canadian bondholders "real" returns (after inflation) will also move considerably lower.
• It would not be surprising for longer-term bond investors to be demanding higher premiums over inflation (higher yields / lower prices).
• Something to watch for as it will impact mortgage rates and other term borrowing costs.
• The Bank Of Canada will have to be "on guard" if inflation rises without economic growth. 
• In the 1980's we termed that scenario as "stagflation"!

US: 

• A similar story: CPI in April rose .1%, but core (after food and energy) prices rose .3%.
• The year over year core rate increased to 1.8% (closing in on the Fed's target of 2%).

• Bond investors will be wary of their future "real" returns.
• Attention must be paid.
• We will be watching closely.

www.highrockcapital.ca