Winnipeg Economic Digest, Vol. 3, Issue 2

Bottom line

Headline inflation continues to ease in Canada and in Manitoba. Thus, given March 19’s CPI inflation release, the odds of the Bank of Canada starting to cut its policy interest rate in the second half of the year are reasonable. Once rates start falling, this will begin to ease interest payment pressures for households and businesses.

The two major components of the CPI (Consumer Price Index) above the headline inflation are shelter and food.  The increase in shelter costs is primarily due to the expenses associated with owning and renting properties rather than the costs of utilities related to housing.

It will take some time for food inflation to weaken, with a drought in Western Canada and rising supply chain costs on the way to consumers.  

Conflicts are affecting agricultural operations, notably:

• The disruption of Ukrainian crop production and shipments impacted routes from the Black Sea to East Africa and the Arabian Sea.
• The limitation on U.S. crop shipments through the Gulf of Mexico and Panama Canal route, with drought conditions reducing transit capacity to the Pacific Rim markets.

Analysis

Global Supply Chain Pressures

During the pandemic, the Federal Reserve Bank of New York released the Global Supply Chain Pressure Index (GSCPI). It rose above two standard deviations for the first time in 2020 due to the severe COVID-19 disruptions to factories, increased demand for goods vs services in 2020/2021, and the backup in supply chains. As vaccines were rolled out and reached broad coverage, COVID–19 restrictions were rolled back. After some time, the shipping backlog was essentially cleared, leading the GSCPI to fall off in late 2023.

We are seeing a nearby spike in the index back up to around a zero standard deviation due to the Bab el Mandeb Strait [1] where shipping is being choked off by Houthi rebels in Yemen shooting at shipping. [2] See Box 1 for details on marine chokepoints. At the same time, the Panama Canal is short on water, so fewer vessels can transit until the lack of rain is resolved.

BOX 1: Global Marine Chokepoints

Source: (Pratson, 2023a, and Pratson 2023b) Major marine chokepoints analyzed in Pratson 2023a study: (A) Panama Canal, (B) Gibraltar Strait, (C) English Channel, (D) Danish Straits, (E) Bosporus Strait, (F) Suez Canal, (G) Bab el Mandeb Strait, (H) Strait of Hormuz, (I) Malacca Strait, (J) Lombok-Makassar Strait, (K) Ombai Strait, (L) South China Sea, and (M) East China Sea.

Thirteen marine chokepoints are highlighted in (Pratson 2023a), and Table 4 (Pratson 2023b). This matrix estimates how a chokepoint closure affects other chokepoints and the rest of marine shipping.

If the Bab el Mandeb Strait (the narrow point currently being choked off by Houthi rebels shooting at shipping) essentially closes, it would also essentially block access to the Suez Canal, disrupting global shipping and trade. And vice versa.

                                                   End of Box 1

CPI inflation: Canada, Manitoba, Winnipeg CMA (Census Metropolitan Area)

As of February 2024, year-over-year headline inflation in Canada has eased to 2.8 per cent. Manitoba and the Winnipeg CMA saw their headline inflation fall to 0.9 per cent and 0.83 per cent, respectively.

In February 2024, Canada’s CPI inflation by major components, Food and Shelter are the two heavily weighted price index series still showing inflation above the all-items inflation of 2.8 per cent. Transportation is only slightly below headline inflation of 2.8 per cent.

In February 2024, Manitoba’s consumer price index (CPI) inflation breakdown by major components shows that 'Food' and 'Shelter' have the heaviest weights and still exhibit inflation rates above the overall CPI rate of 0.9 percent. In contrast, the 'Transportation' category shows inflation well below the headline rate of 0.9 percent.

Why is Manitoba’s CPI inflation so far below Canada’s?

The Manitoba government announced on November 23, 2023, that it was instituting a six-month fuel tax holiday starting January 1, 2024. This is why Manitoba’s year-over-year gasoline inflation was 16 to 19 percentage points lower than Canada's overall. [3]

Monetary Policy

Given where Canadian headline inflation is at, there is a wide-spread expectation that the Bank of Canada will begin lowering its policy rate sometime in the second half of 2024, depending on their read of the data. [4] Once that slow decline begins, it will reduce pressure on personal, organizational and government borrowing.

Quantitative tightening has brought the Bank of Canada’s assets by type down to $314 billion, which is close to the $292 billion estimate we had put together in 2022.

Shelter Inflation

While the details vary, inflation related to owned and rented shelter is the primary driver of shelter inflation in Canada, Manitoba, and the Winnipeg CMA. Manitoba and the Winnipeg CMA have recently seen their utility shelter index inflation weaken.

Food Inflation

The other major category driving inflation higher is food. As of February 2024, Canadian food inflation from food stores has eased back to 2.4 per cent, while restaurant inflation has risen to 5.1 per cent.

As of February 2024, Manitoban food inflation from food stores has eased back to 2.7 per cent, while restaurant inflation is still 4.7 per cent.

Other Food related thoughts

A March 14, 2024, presentation, “Beyond Greedflation," noted that food inflation has many driving factors. These include droughts (which reduce food supplies). Other factors include the Russian invasion of Ukraine, some hang-over from the COVID-19 pandemic, the current reduced ability of Panama Canal, the partial closure of the Bab el Mandeb Straight due to Houthi rebels attacking shipping, increased wages along the food value chain, and food packaging costs.

The presentation noted that farmers are price takers for both inputs and outputs. A recent APAS (Agricultural Producers Association of Saskatchewan) research report noted that price inflation at the farmgate was smaller in the eight cases they considered versus price inflation at retail. [5]

The Canadian cattle herd will take time to recover since there is currently a drought in Western Canada. Even once that drought clears, due to biological constraints, it takes a year or two before the herd can begin to recover.

A new variant of C.O.O.L in the USA

Another issue that may discourage the cattle/beef and hogs/pork industry’s functioning is a new round of protectionism in the US. There is a new variant of C.O.O.L. [6] The latest attempt is again driven by the US rancher lobby organization R-CALF. The changes would be issued under US Ag Secretary Vilsack. There is potential for this to drive meat prices higher in the USA, and to discourage the recovery of the cattle and hog herds in Canada.

END NOTES

[1] When the Bab el Mandeb Strait is closed off, this essentially closes off the Suez Canal, and Vice Versa. See Box 1.

[2] The Houthi in Yemen, an Iranian proxy organization like Hamas, has tied their attacks to events in the Gaza Strip.

[3] It is possible that the temporary fuel tax holiday may be extended due to a 3-month pipeline shutdown for fuels being shipped into Winnipeg. It is not clear yet whether that would occur. See WFP March 19, 2024 article. As noted in the article, Provincial and City of Winnipeg officials are not expecting major disruptions in supply because trucks and trains will be used to replace the pipeline supply while repairs are done.

[4] For example: The C.D. Howe Monetary Policy Council’s February 29, 2024, call is the rate decline to 3.5 per cent by March 2025, down from the current 5.0 per cent.

[5] APAS. (2023). Farmers and Food Prices: 2023. Regina: The Agricultural Producers Association of Saskatchewan. Based on USDA ERS methodology.

[6] The previous variant was M-COOL which cost Canadian and Mexican producers billions, and caused havoc in North America’s integrated markets for beef and pork. A WTO ruling in 2015 tossed out M-COOL.