by Benjamin Tal
Senior Economist

We have reached a point in the recovery process that headline economic numbers can be very misleading. Before acting on any specific number, one should dig a bit deeper to get a better sense of the underlying trends.

A few recent examples:

• On the surface Canadian inflation is heating up again. The headline core CPI rose by 2.1% on a year- over-year basis—a bit above the Bank of Canada’s target. However, a closer look reveals that like the deflation hype during the recession, inflation fears during the recovery might just be a little overblown. Note that the month of February saw almost 20% increase in traveler accommodation prices, most likely linked to the Olympics. In fact,  five of the eight broad CPI categories were either down or flat in February.
• Retail sales in Canada rose by a strong 0.7% in January, but that reflected price hikes rather than volumes, as sales were up only 0.1% in retail terms. The price gains captured reduced discounts at car dealers and higher gasoline prices. There was also a spike in nominal sales at building supply stores as buyers rushed to beat the deadline for the home reno tax credit.

While Real GDP in Canada is likely to rise by close to 5% in the first quarter, one has to remember that a significant portion of this growth is temporary (government spending and inventory cycle). The underlying trends in the fundamentals (including inflation) suggest that the Bank of Canada will not hike rates before June or July.

In the US, the problem in the commercial real estate sector are becoming more and more evident in the number of small regional banks in the US that are at risk. More than 10% of the 700 banks that got federal bailouts and are still holding the money, failed to pay the government a quarterly dividend in February. The list of 82 delinquent banks is larger than the 55 banks that failed to make payments in November.  Still on that front, The NY Fed purchased an additional net $10 billion in MBS for the week ending March 17th. This puts the total purchases at $1.24 trillion or 99.2% complete. The ending of Fed purchasing of MBS might lead to a modest (20-30 basis points) increase in long-term mortgage rates.

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Tags: Economy, GDP, inflation