Above Average

They say the problem with being average, is that you are simply average. As I like to ask people ” Think of how dumb the average person is, and then remember that 50% are even dumber than that”.

Yesterday saw the release of the Canadian January inflation numbers, and I have to be bearer of bad news, but they were less than average. Now I know most people in our business are out jumping for joy because inflation starts with a 2 handle, but pry yourself away from your alcoholic drink for a minute, and read on.

The issue that we have always had with statistics like inflation, is that they are, well….averages. Averages are made up by averaging things out. In this case, the inflation report averages out the cost of many items. Yes, I know, the headline number reported was 2.90%, and that was well below the consensus of 3.39%, but it ain’t all sunshine and roses. While headline came in at 2.9%, CPI trim and CPI median were still elevated well above 3% coming in at 3.4% and 3.3% respectively. Before rate cuts are on the table, we will need to see every metric well into the mid 2’s. I agree the trend is our friend, but the economic backdrop is certainly not friendly, but still a hospitable environment for people trying to make their way in life.

The problem specifically relating to the inflation average, is the way they compute and calculate what goes into the reading. The reason the headline number was down in January was because gas prices plunged year over year. That is because oil is down. However, that is good news for anyone that drives a car, so let’s take that as a win. However, the main thing elevating inflation for the month was shelter costs, with mortgage interest costs up 27.4% and rents up 7.9%. Food inflation was also still elevated at 3.4%. So, if you live somewhere or you eat food – inflation is still a problem. Now even though food inflation was up, it was actually up a lot more than the number even suggests. Stats Can uses a basket method to determine inflation. Lets explore. In that basket, in the month of January we saw bread, dairy, meat, and fresh fruit all up, but the price of soup and prawns did drop. Again, not many people I know have a diet that consists of prawns and canned soup. For the average Canadian the grocery inflation is still a large problem. And, since Bell Media is already getting kicked around in the news these days, let’s add a little insult to injury, and mention that cellular phone costs were up 6.7% in the month.

Now, its not all bad news bears though, as airline tickets declined dramatically (13.7% ), as did the cost of travel packages like all inclusive vacations. Again, does the average Canadian see the benefit of lower airfare and vacations? Maybe, but posed another way:

Does the reduction in air travel, all inclusive vacations, and gasoline offset the cost of their rising grocery bill, rising cell phone bill, and mortgage servicing costs? I think we all know the answer for most of our clients. However, this is how averages work. The massive reduction in gasoline, air travel and vacation packages was enough to drag down the headline inflation number quite a bit. As most of you know I have 4 boys. In our house there is 5 boys including me, and 1 woman with my wife. If the cost of female clothing went down by 10%, and the cost of boys clothing went up by 3%, you could, on average say that clothing declined by 7%. However, in my specific circumstance, inflation did not go down, it went up. Think of this example as how the average Canadian family sees the effects of inflation. The only families that really should be excited about the reduction for January is a family that only eats prawns and canned soup, while flying first class to their all inclusive vacation. Everyone else will actually see the average prices for the items they spend money on go up.

Of course, mortgage brokers and realtors will be using January’s numbers to dust off the ” buy now before you can’t” mantra, and house prices to the moon marketing campaigns. In fact, I have already seen a lot of pieces out there saying how everyone should be elated by the inflation report. Well, maybe, but I am not so sure.

Some way, and somehow, we have this sense that inflation coming down is a good thing. Well, it isn’t. Inflation falling will eventually lead to deflation, and that is a dragon we don’t even know how to slay. Inflation only drops when the economy is struggling. Inflation only comes down when the number of people chasing goods is less than the number of goods available for purchase. This means that supplies start to build, sales start to slow, and layoffs start to go out. A little disinflation is a good thing, but be careful how much disinflation you wish for. If we see inflation dip below 2% it spells trouble for the economy. You might want to also hold off on the rate cut predictions, as Tiff and Co. are likely to hold off until the really see data showing they have inflation under control ( all metrics in and around the 2% threshold ) Say what you want about Uncle Tiff ( and trust me, we all have ) but he is not going to cut too much or too soon, and risk blowing fresh oxygen on the hot embers of Canadian housing. The BOC know damn well if they cut too soon, it will re ignite the problem that started all of this in the first place.

Be careful what you promise your clients, and be very keen to help them understand how the inflation report affects their daily lives. News agencies do a shit job at showing anything other than the headline number, and that is misleading at best. And, above all, don’t be average!!