Financial security

November 2013 CPI: Is disinflation a matter of excess supply or soft demand?


There’s no shortage of theories going around to account for continued disinflation in Canada over the past year. The Bank of Canada (BoC) cites stores’ deep discounting for disinflation threat. Others wonder if inflation is low because consumers expect it to be low.

This morning’s release of StatsCan’s not-nearly-all-items Consumer Prince Index (CPI) report noted overall prices increased just 0.9% year-over-year in November, below the BoC 1-3% target range. The biggest component of the CPI basket, shelter, increased just 1.8% year-over-year. Breaking shelter down further, StatsCan tells us rents rose 1.7% while “homeowners’ replacement cost”, a fraction of  what homeowners actually pay, rose just 1.5%. However, mortgage interest cost, which is accounted for in the CPI basket, declined 2.1% year-over-year.

Another release that received far less coverage earlier in the week, from The Canadian Real Estate Association, also looked at home prices. It noted that the MLS® Home Price Index (HPI) rose 4.1% year-over-year in November. While the MLS index is not without its issues, the disparity between its home price index and StatsCan’s homeowners’ replacement cost is rather remarkable.

After paying the rising actual costs of renting or owning a home, along with repairs/renos, condo and all manner of other rising fees and taxes not included in the not-nearly-all-items CPI basket, consumers had a lot less left over to spend on the stuff in the basket. Any retail transactions that would have taken place would necessarily have been at lower prices – to meet weaker demand from increasingly tapped out and debt-constrained consumers.

Retailers would have had to cut prices to move merchandise even without oversupply. Perhaps the BoC is suggesting retailers try artificial supply shortages? Anyway, disappointingly poor, incomplete analysis by BoC..

The consumer-inflation-expectations view is somewhat cynical. Yes, presumably consumers expect low-prices, or at least anticipate them. Otherwise they ain’t buying- since, as just mentioned, they’re tapped out. It’s not really price expectation so much as financial insecurity.

This is probably as good a time as any to mention the spiraling race to the bottom. It should come as no surprise that most of the home electronics and other stuff consumers are expected to frenzy-buy at Canadian retail outlets this holiday season are made in Asia (mostly China and Taiwan). That’s where manufacturing, along with all the jobs directly and indirectly generated by the sector, has increasingly been outsourced in the drive to reduce unit costs and increase corporate profits. Many related support and service, along with an increasing number of professional service, jobs have likewise been outsourced (mostly to India) due to advances in information and communication technology.

As long as drops in demand from the continued stagnation/decline in household earnings were mitigated, through substitution with more precarious employment, increased consumer debt, government transfers – whatever, as long as the corporations doing the outsourcing didn’t have to pay for it, the system worked. That it’s now stalling may be a harbinger of things to come…

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