Blogs & Comment

Inflation watch: June 17

Prices continue to inch upward, but interest rates still slow to rise.

When I was researching a story on inflation for the magazine and few months ago (“The Rising Price Of Everything”), one oil industry analyst told me that gas prices are quick to go up, and sticky to come down. I’m starting to wonder if the same couldn’t also be said of other consumer goods, as inflation—though slowed—remains a thorn in the side of many of the world’s major economies.

In the U.S., consumer prices in May continued to inch upward, albeit at the slowest pace this year. The Labor Department’s Consumer Price Index (C.P.I) was up 0.2% in May. The increase was greater than analysts expected, but still an improvement over April, when the C.P.I. rose by 0.4%. As Paul Ballew, a former Federal Reserve economist and now the chief economist at Nationwide told the New York Times, “It is not that inflation is roaring ahead, but there are enough price pressures to put a squeeze on consumers and businesses.” Core inflation (which does not factor in the price of energy or food) also exceeded analysts expectations, rising 0.3%—the most significant increase since July 2008.

In Canada, higher inflation in the U.S. combined with slower manufacturing on both sides of the border strengthened government bond prices. Meanwhile, Bank of Canada governor Mark Carney again warned that interest rates are headed for a hike. “Low policy rates, even if appropriate to achieve the inflation target, create their own risks,” he said while speaking in Vancouver on Wednesday about the threat of a housing bubble. However, TD Bank chief economist Craig Alexander now predicts it will be early next year before Carney touches rates, which he says will reach 2% by summer 2012 and 3% by the end of 2013. “With the U.S. Federal Reserve on hold, the Bank of Canada is also constrained in raising interest rates, as widening interest rate spreads would boost the Canadian dollar that is already above parity,” he said in a report released Tuesday.

But it’s not all bad news. There’s a (very slight) glimmer of hope in the euro zone, where inflation rates dropped in May—the first time in nine months. According to the European Union’s Eurostat agency, annual inflation was 2.7% in May, down from 2,7% in April. Still, The Wall Street Journal reports that consumer prices stayed the same on a monthly basis, due to the rising price of food, which offset lower prices on fuels and packaged holidays. And despite the decease in inflation, observers still anticipate that the European Central Bank will raise interest rates in July.