In today’s note, Gluskin-Sheff economist David Rosenberg is back talking about deflation:
Deflation remains the primary trend, notwithstanding the bounce in commodity
prices that surely are going to act as a significant margin squeeze for retailers.
The headline CPI inflation rate came in at a mere +0.1% in March and the core
was unchanged. When oil prices first broke above $80/barrel back in 2007, the
inflation rate was closer to 4%. Then again, the unemployment rate was below
5% and CAPU rates approaching 80%, not near-10% and 70% respectively as is
the case today.
The economy may be doing better but it could take years to absorb all the slack
evident in the labour, product and housing markets. The core rate of inflation is
all the way down to +1.1% and the combination of base effects, the lagged
impact of the strong U.S. dollar and the continued decline in residential rents
suggest that this trend will break below 1% by May and could evaporate totally
within a year. As it now stands, the three-month trend in the core CPI is 18 basis
points below zero, something that has not happened in 50 years.
There are no shortages of complaints that the disinflation trend is being skewed
by lower rents. Our response: rent matters a lot in the consumption basket and
the fact that it is deflating is a sign of stress in both the labour market in terms
of still punishingly high unemployment rates and the effects on income, as well
as in the housing market (i.e., near record high apartment vacancy rate).
Not only that, but core CPI excluding the rent influence was at +0.1% mum and
has still hooked lower to +1.7% on a YoY basis and the trend is still on a firm
The second chart below shows the smoothed CPI index from the
Cleveland Fed– down to 1% YoY, which is a fresh record low. The bottom line is
that core goods CPI has fallen 0.1% now for two months in a row and the core
PPI for finished consumer goods is pointing to further deflation here in the
coming year, especially as the lagged impact of the firming in the greenback
since last fall.
The deflationary pressure was widespread across sectors last
month: Restaurants and toys were both down 0.1%. Appliance prices fell 0.3%
and furniture by 0.3%. Clothing prices fell 0.4% and are down now for three
months running. Recreation services (i.e., movie theatres) dropped 0.6%. Home
improvement, despite how great it was in the retail sales report, also deflated by
0.3% in March. The prices of housekeeping supplies fell 0.2%. Autos and parts,
IT services as well as telecom were roughly flat. So you see, this was hardly a
report that relied solely relied on rental rate declines.
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