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Multiple Layers to the Inflation Watch Story

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There are two major questions overhanging the economies of the U.S. and Canada. (1) Will a reemergence of coronavirus infections, mainly among the unvaccinated and tied to the Delta variant of the disease, force a slowdown in what was proving to be exceptional gross domestic product (GDP) growth? And (2), the subject of this article, will rapid price increases compel the Federal Reserve and the Bank of Canada to move more aggressively on interest rates?

Multiple Layers to the Inflation Watch Story Graphic

In June, the All-items Consumer Price Index (CPI-U) in the U.S. moved up to +5.4% year over year from +5.0% in May. What’s known as ‘headline’ inflation in America is now increasing at its fastest rate in more than a decade. The ‘core’ rate of inflation, which omits volatile energy and food components, has increased to +4.5% y/y from the previous period’s +3.8%.

In Canada, headline inflation downshifted to +3.1% y/y in June from +3.6% y/y in May and, leaving out food and energy, it eased to +2.2% y/y from +2.4% y/y.

The problem in assessing what the Fed and the BoC might do with interest rates, however, is that they focus on different measures of inflation than the rest of us. The Fed closely monitors prices tied to Personal Consumption Expenditures (PCE) in the National Accounts, and that measure is currently restrained at only +3.4% y/y for May. (The reporting period for the PCE measure always trails the CPI by a month.)    

The BoC looks at three measures of inflation it has labeled ‘common,’ ‘median,’ and ‘trim.’ At +1.7% y/y for ‘common,’ +2.4%y/y for ‘median,’ and +2.6% y/y for ‘trim,’ they are currently (June 2021) averaging a hardly worrisome +2.2% y/y. A fuller explanation of the BoC’s preferred inflation measures can be found in a footnote at the end of this article*.

The Fed and BoC aren’t expressing any great concern about inflation, adopting the stance that present upticks in prices will prove temporary. A year ago, when consumers were in the early stages of lockdown, prices for many items, i.e., men’s and women’s clothing, airline tickets, hotel, and motel room rates—even gasoline nosedived. Now, naturally enough, with economic activity moving closer to full swing, those same items are moving up in price again and a ‘low base effect’ in the year-over-year percentage change calculation is exaggerating the climb.

The Joe and Jill Average Take on Inflation

But the ‘low base effect’ is far from being the whole story. There are some severe material and labor shortages.

Carmakers are unable to maintain previous target production levels because their sources of computer chips are unable to fulfill contracted orders. One consequence has been a surge in used car and truck prices, +45.2% y/y in the U.S. In Canada, the cost of renting passenger vehicles is +29.8% y/y.

Restaurants that are re-opening are cordoning off sections of their dining space because they can’t find the staff to wait on all their tables (and this is even after adding more ‘social distancing’ room between patrons.) Also, recent harder-to-obtain, and therefore expensive, entrée items (beginning with some specialty seafood) are being left off menus.

And everybody (you, me, and Joe and Jill average) knows that anything contributing to an easier lifestyle while we’ve all been staying indoors more, at home, during the pandemic has gone up in price. ‘Laundry equipment’ as a subitem of the U.S. CPI-U is +29.4% y/y. ‘Refrigerators and freezers’ as a sub-item of Canada’s CPI are +9.8% y/y. ‘Furniture’ in the U.S. is +10.8% y/y. ‘Wooden furniture’ in Canada is +13.6% y/y and ‘upholstered furniture,’ +10.3% y/y.

On the Wages Lookout

When the inflation question will become super-interesting is in about six to nine months from now, in late 2021 and early 2022. By then, most of the material supply shortage issues will have been worked out. But there’s the matter of wage increases remaining to be addressed.

Overcoming the shortages of workers to fill key positions will require promotional hiring and reeducation efforts carried out over extended time frames; also, when possible, investments in automation that will take capital expenditures. Topping up staffing in the short term will almost certainly mean more financial rewards and benefits being offered to prospective employees. And that may well keep the inflationary fires burning.    

Graph 1: Inflation Measures (Year-over-Year) U.S. and Canada
Previous Month & Current Month (May & June 2021)

The key inflation figure monitored by the U.S. Fed is the price index for Personal Consumption Expenditures (PCE), excluding food & energy. In June 2021, it was +3.4% y/y. The Bank of Canada monitors 3 'preferred' measures of core inflation, 'common', 'median' and 'trim'. Year over year, in June 2021, they were +1.7%, +2.4% and +2.6% respectively.

*’Core’ inflation for both countries excludes highly volatile items − i.e., mainly food & energy products.

Data sources: Bureau of Labor Statistics & Statistics Canada.
Chart: ConstructConnect.

Graph 2: U.S. Inflation: All Items (CPI-U) vs All Items Less Food & Energy (i.e., ‘Core’*)
(Not Seasonally Adjusted)

In the U.S., the June 2021 changes in the energy sub-component index were +24.5% y/y & +2.3% m/m (NSA). Gasoline was +45.1% y/y & +2.2% m/m (NSA).

The latest data points are for June 2021.
The U.S. figure (CPI-U) is the All Items Consumer Price Index for All Urban Consumers.
*Core inflation is CPI-U less its often most volatile sub-components, food, and energy.

Data source: U.S. Bureau of Labor Statistics (Department of Labor).
Chart: ConstructConnect.

Graph 3: Canada Inflation: All Items CPI vs Core*
(Not Seasonally Adjusted)

In Canada, the June 2021 changes in the energy sub-component index were +19.5% y/y & +0.9% m/m (NSA). Gasoline was +32.0% y/y & +1.6% m/m (NSA).

The latest data points are for June 2021.
The Canada figure (CPI) is the All Items Consumer Price Index.
*Core inflation is CPI-U less its often most volatile sub-components, food, and energy.

Data source: Statistics Canada.
Chart: ConstructConnect.

Graph 4: U.S. vs Canada All-Items Inflation
(CPI & CPI-U Not Seasonally Adjusted)

In non-CPI pricing news, Statistics Canada's New Housing Price Index (NHPI) for single-family homes in June 2021 was +11.9% y/y. In America, the Federal Housing Finance Agency (FHFA)'s latest selling price index for existing single-family homes was +18.0% y/y (May 21/May 20).

The latest data points are for June 2021.

Data source: Statistics Canada and U.S. Bureau of Labor Statistics (BLS).
Chart: ConstructConnect.

Graph 5: U.S. vs Canada Core* Inflation
(CPI Core & CPI-U Less Food and Energy Not Seasonally Adjusted)

Worth noting is that the 'core' rates of inflation for the entire duration shown in the graph, and for both the U.S. and Canada, have never dropped to zero, not even in slowdowns/recessions (2001; 2008-09; and 2020).

The latest data points are for June 2021.
*Core is all-items inflation less its often most volatile sub-components, food, and energy.

Data source: Statistics Canada and U.S. Bureau of Labor Statistics (BLS).
Chart: ConstructConnect.

Graph 6: U.S. Inflation Rate

The U.S. 'All-items' index in December was +0.9% NSA month to month.

Based on year-over-year ‘All-Items’ Consumer Price Index (CPI-U), not seasonally adjusted (NSA).
CPI-U is for ‘All Urban Consumers, U.S. City Average’. A desirable rate of inflation is around +2.0% y/y.
Latest data points are for June 2021. *NSA in the m/m change is not seasonally adjusted.

Data source: Data source: Bureau of Labor Statistics (BLS).
Chart: ConstructConnect.

Graph 7: Canada Inflation Rate

The Canadian 'All-items' index in June was +0.3% NSA month to month.

Based on year-over-year ‘All-Items’ Consumer Price Index (CPI-U), not seasonally adjusted (NSA).
For a variety of reasons, there is a desirable rate of inflation and it’s around +2.0% y/y.
Latest data points are for June 2021. (*NSA in the m/m change is not seasonally adjusted.)

Data source: Statistics Canada.
Chart: ConstructConnect.

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Policing review says violence against women is as important as terrorism

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A new report says tackling violence against women must be considered as much of a priority for the police as anti-terrorism.

The report, undertaken by Her Majesty’s Inspectorate of Constabulary and Fire & Rescue Services (HMICFRS), was commissioned by home Secretary Priti Patel in the wake of the murder of 33-year-old Sarah Everard in March this year and recommends a “radical shift” in the way crimes against women and girls are considered.

It further expressed “grave concerns” regarding the number of cases closed without charge, “major gaps” in the data recorded on offences, and the “staggering” degree of variation in attitudes toward domestic abuse across police forces in England and Wales.

Speaking on the BBC Radio 4 Today programme this morning, the report’s author, Zoe Billingham HM Inspector of Constabulary said that, “ There is a real sense, I think, in the wake of this epidemic of violence, that enough is enough. There needs to be a whole new way of dealing with this and this is what we set out in our report today”.

Although acknowledging that the police had vastly improved in their response over the last 7 years, Billingham said, “We are not going to police our way out of the breadth and depth of the crimes that are being committed against women every day” stating that “we think there needs to be an uplift in the prioritisation of the violence against women crimes”.

The report also found that the total of investigations into sexual attacks against women shelved because of ‘evidential difficulties’ tripled from 4,326 cases in 2014-15 to 13,395 in 2019-20, a figure Billingham described as “eye-wateringly” high.

She went on to argue that some sexual predators and domestic abusers are ‘laughing’ at the law, as police will often not act against people who have repeatedly breached non-molestation orders.

In an interview with BBC Radio 4 on Friday, Labour MP and former minister Harriet Harman said she gave “all credit to the Home Secretary” for commissioning the review, but said she hoped the government would now take action as a result of the findings, and said the home office must “immediately tackle domestic violence a priority in the strategic policing requirement – which at the moment it isn’t”.

She also said it was “completely not acceptable” that Labour MP Rosie Duffield, who has attracted controversy due to her comments on gender self-identification, may not attend the Labour Party conference due to fear of personal safety.

Ahead of the report’s release, shadow minister for domestic violence Jess Phillips said via Twitter:

“So who is now the Home Office Minister for safeguarding with responsibility for the biggest violent crime type in the UK? Because tomorrow there is a report coming from the inspectorate in to how well that’s going, so they better get reading pretty quick.”

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SNIPEF boosts industrial relations support

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The Scottish and Northern Ireland Plumbing Employers’ Federation (SNIPEF) has strengthened its industrial relations advisory service with a new appointment.

Read Full Article: The Construction Index

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McLaren wins new Aston Martin F1 factory race

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The Enquirer understands McLaren will deliver the £200m project which will see construction of a new factory and testing wind tunnel at the new headquarters for the Formula One team.

Building work will take 18 months on the scheme designed by Ridge and Partners LLP

Three buildings across 400,000 sq ft will house the team’s design, manufacturing and marketing resource, the brand-new wind tunnel and a factory and logistics centre.

McLaren declined to comment.

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