The ease with which the US and Canadian economies recover from the economic slowdown caused by the Coronavirus will largely depend on whether we can escape without a major spike in inflation. Over the next six months to the next year, everyone in my profession will be watching how prices work. For now, general price inflation, as represented by the CPI numbers, remains restrained, although there are some indications that the “all-element” and “core” values are at + 2.0% annually. For example, in Canada, there are two of the three “primary” metrics that the Bank of Canada is monitoring now at + 2.0% year over year. BoC’s third “primary” scale is + 1.3% per year (see bottom text box in Chart 5). The current highest reading for headline inflation in the US is + 1.5% year-over-year for the PCE Price Index, excluding food and energy. Incidentally, the “core” CPI against “all elements” ignores the elements that often exhibit extreme price volatility, especially in the areas of food and energy. The price of gasoline, which is an important benchmark, since it is associated with a widely used product, is still lower than it was a year ago in both countries, -8.6% annually in the United States and -3.3% annually. in Canada. But in the last month (January 2021), with the cost of a barrel of global oil rising by about $ 60, gasoline was + 6.9% m / m south of the border and + 6.1% m / m on the north side. The Government Deficit and Debt Dilemma Given the massive expansions in government deficits and debt that have occurred (and arguably necessitated this) efforts to revive the economy and provide cushions to many “stranded” individuals and companies, it is crucial that interest rates remain low. To a large degree, central bank interest rates are subject to inflation. A very rapid increase in the latter causes bullish adjustments to the former. There is a risk that if yields rise too much (and there is still no clear consensus as to what that level could be), transportation costs will become prohibitively high. And there will be another financial crisis. The strong hope is that economics will improve quickly and large enough to nullify the tax revenues of large parts of the government’s debt financing problems. The expectation of higher inflation soon is already leading to interest rate hikes for commercial banks that are separate from the “hold” positions of the Federal Reserve and the Bank of Canada. Moderate inflation versus hyperinflation may turn into the fulcrum on which all our senses of well-being will depend once these pandemic days are behind us. Chart 1: Inflation in the US: All Items (CPI-U) versus All Items Less than Food and Energy (ie ‘core’ *) (not seasonally adjusted) Most recent data points for January 2021. The US number (CPI-U) is Consumer price index for all commodities for all urban consumers. * Core inflation is CPI-U below the more volatile, food and energy subcomponents. Data source: US Bureau of Labor Statistics (Department of Labor) chart: ConstructConnect. Chart 2: Inflation in Canada: Consumer Price Index (CPI) for all items versus core * (not seasonally adjusted) The latest data points are for January 2021. The Canadian figure (CPI) is the Consumer Price Index for all items. * Core inflation is CPI-U much lower than the more volatile subcomponents, food and energy. Data source: Statistics Canada. Diagram: ConstructConnect. Graph 3: US and Canada All Item Inflation (CPI & CPI-U not seasonally adjusted) Most recent data points for January 2021. Data source: Statistics Canada and US Bureau of Labor Statistics (BLS). Diagram: ConstructConnect. Chart 4: US vs. Canada Core * Inflation (CPI Core & CPI-U below food and energy unadjusted seasonally) most recent data points for January 2021. * Core is inflation of all components below the more often volatile subcomponents, Food and energy. Data source: Statistics Canada and the US Bureau of Labor Statistics (BLS) chart: ConstructConnect. Chart 5: Inflation measures (year on year) in the United States and Canada last month and this month (December 2020 and January 2021) * “Core” inflation for both countries does not include highly volatile items – mainly food and energy products. Data sources: Bureau of Labor Statistics and Statistics Canada chart: ConstructConnect.