NEW YORK -- The producer price index (PPI) advanced 0.3 percent in February month-over-month. The year-over-year rate moderated to 6.4 percent from 7.4 percent in January but still remained well above the 3 percent pace averaged since 2000.
Month-over-month growth in the core index came in at 0.5 percent, above expectations calling for a 0.2 percent gain, partly reflecting a 0.8 percent increase in passenger car prices as well as a 0.5 percent increase in capital equipment prices. Annual growth in the core index accelerated to 2.4 percent from 2.3 percent in January.
The lofty annual growth in both the all-items and core PPI indices would normally raise concerns about upside risks to inflation. However, in the current environment, this risk is being overwhelmed by the weakness in credit markets and attendant upward pressure on the cost of capital. As a result, monetary policy in the near-term is expected to be focused on preventing the economy from slipping into a prolonged downturn.
With financial market jitters particularly acute in the wake of the recent rescue of Bear Stearns from financial collapse over the weekend, RBC Financial anticipates an aggressive policy response from the Fed later today. The accompanying statement is expected to make clear that further Fed actions to inject liquidity into the system will be undertaken if the downside risks to growth fail to abate.
Canada’s core inflation edges higher; all-items rate slips below 2 percent
The year-over-year all-items inflation rate slid to 1.8 percent in February in line with market forecasts, while the Bank of Canada’s core inflation rate (CPIX) edged up to 1.5 percent. Markets had expected the core rate to fall to 1.2 percent. The monthly all-items index rose 0.4 percent in February over January, while the CPIX jumped 0.5 percent on the month.
The strong monthly increases in both the all-items and core inflation rates reflected an as-expected rise in the cost of travel tours, which jumped 9.9 percent in February, largely reversing January’s 10.3 percent drop. Traveler accommodation prices also rose 5 percent. Higher prices for clothing also supported the monthly gains, with men’s clothing prices up 4.9 percent. Transportation costs, however, cooled, reflecting a 1.8 percent decline in the cost of vehicle purchases and leases as manufacturers cut suggested retail prices and increased incentives.
On a year-over-year basis, higher gasoline prices (up 17.1 percent relative to February 2007) combined with increased costs of heating oil and other fuels supported the 1.8 percent rise in the all-items rate. Mortgage interest costs were 8.1 percent higher than a year earlier and homeowners’ replacement costs were 4.8 percent above the February 2007 level. Costs for the purchase/lease of motor vehicles, however, were 6.8 percent lower than a year earlier, reflecting dealer incentives and cuts to manufacturers’ suggested retail prices.
The decline in this component was the biggest since February 1956. Prices for computers continued their downward trek and were 15.4 percent lower than in February 2007, while the prices of fresh fruits and vegetables fell as the strong Canadian dollar depressed the prices of imported food. Goods prices were unchanged from February 2007, while services prices were 3.5 percent higher than a year earlier.
Despite the unexpected uptick in the Bank’s core measure, both the core rate and the all-items index were below 2 percent in February, leaving the Bank of Canada free to keep its sights on mitigating the downside risks to economic growth coming from the weakening U.S. economy and financial market volatility.
RBC Financial expects that both the core and all-items inflation rates will hold in the lower end of the bank’s 1 percent to 3 percent target band for most of this year, with the pace of economic growth expected to slow to 1.7 percent from 2.7 percent in 2007.
Canada’s domestic economy continued to exhibit decent growth momentum early in the year, with February’s labor data showing another surge in employment, but the trade sector remains a major source of weakness for Canada’s growth outlook. RBC looks for the trade sector to exert a powerful drag on the pace of expansion, which, combined with the weakening in financial markets and rising cost of capital, will keep the Bank of Canada on an easing path in the months ahead.
Decline in U.S. housing starts smaller than expected, but permits collapse
U.S. housing starts fell by a smaller-than-expected 0.6 percent in February. The level of housing starts in January was upwardly revised to 1.071 million (previously reported: 1.012 million units). Markets were expecting a drop to 995,000 units from January’s originally reported level.
All of the weakness was concentrated in the historically more stable singles component, which dropped 6.7 percent to an annualized 707,000 units. In contrast, the multiples component rose 14.4 percent to 358,000.
The weakness in starts was concentrated in the northeast (down 27.7 percent), where inclement weather conditions may have played a role. Discouragingly, permits dropped 7.8 percent to an annualized 978,000 units, pointing to further weakness in starts going forward.
Although the drop in starts was less than expected, the collapse in permits highlights that the housing market remains under downward pressure. Today’s data put housing starts down 7.2 percent relative to the fourth-quarter average, consistent with our forecast calling for residential construction to decline at a greater than 20 percent annualized pace in the first quarter.
RBC Financial’s forecast also sees residential construction chopping close to one percentage point off overall economic growth in the quarter. Looking ahead, still-elevated inventories in the housing market — the months’ supply measures in both the new and existing home markets are well north of their long-term averages — will cause housing starts to fall further and, as a result, residential construction to continue to be pared back.