U.S. inflation expected to decline further: BMO

This article taken from the Financial Post. It sounds good (limited inflation for US economy, but if you read the details as to the why, you see all is not as roseyas one might suspect. Enjoy, Brad

By John Shmuel May 31, 2010 – 10:35 am

Inflation in the U.S. remains weak and is expected to decline further despite a surprisingly solid American economic recovery, according to BMO Capital Markets analyst Sal Guatieri.

Core consumer prices have risen 0.9% year-over-year from 2009. Much of that has been bolstered by a 38.3% hike in gasoline prices during that period. Without gasoline, consumer prices have increased a mere 0.5%.

Mr. Guatieri notes that inflation will likely continue to decline further because of several stress factors on the economy. That includes a high unemployment rate which is keeping consumer spending in check.

“The unemployment rate is about four-to-five percentage points above its steady-inflation level. The current high rate discourages workers from demanding wage increases, while draining pricing power from retailers,” he writes in his report titled Deflation Déjà Vu. A high vacancy rate meanwhile will also drag down inflation.

“Rents should continue to soften in the wake of a near record-high 10.6% rental vacancy rate and record-high mortgage delinquencies and foreclosure inventories,” Mr. Guatieri notes.

The disinflation, as Mr. Guatieri refers to it, contrasts with gains made in Canada, where the inflation rate rose in April and retail prices surged.

Canada’s April inflation rate was 1.8%, compared with 1.4% in March, according to Statistics Canada. The April increase caused the country’s core rate to edge up to 1.9%.

Despite continuing decreases in inflation in the U.S., Mr. Guatieri highlights a number of factors will prevent deflation from taking root.

Some services, such as medical care and education, are not considered to be in excess supply and will keep balance out deflationary elements such as rental prices. Mr. Guatieri also highlights that expectations remain near the preferred 2% inflation rate. He also points to a rise in commodity prices due to global demand and an expected GDP growth number of 3% as reasons that will alleviate the downward pressure on deflation.

“All in, these factors will likely prevent CPI inflation from slipping below 1% and core inflation from breaching 0.5% this year, and could lift inflation slightly in 2011,” he writes in his report.


John Shmuel